1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22874
------------------------
UNIPHASE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 163 BAYPOINTE PKWY SAN JOSE, CA 95134 94-2579683
(STATE OR OTHER (ADDRESS OF PRINCIPAL (ZIP CODE) (I.R.S. EMPLOYER
JURISDICTION OF EXECUTIVE OFFICES) IDENTIFICATION
INCORPORATION OR NO.)
ORGANIZATION)
Registrant's telephone number, including area code (408) 434-1800
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 15, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $793,456,741 based
upon the average of the high and low prices of the Common Stock as reported on
The Nasdaq National Market on such date. Shares of Common Stock held by
officers, directors and holders of more than 5% of the outstanding Common Stock
have been excluded from this calculation because such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of September 15, 1997, the Registrant had 17,181,518 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein)
Portions of registrants 1997 Annual Report to Stockholders (Part II)
Portions of registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders (Part III)
================================================================================
2
PART I
ITEM 1. BUSINESS
GENERAL
Uniphase Corporation ("Uniphase" or the "Company") is an optoelectronics
company that designs, develops, manufactures and markets fiber optic
telecommunications equipment products, laser subsystems and laser-based
semiconductor wafer defect examination and analysis equipment. Optoelectronics
is a technology that extends the speed and capacity of conventional electronic
solutions by addressing many of the constraints of the electron with the
particle of light, the photon. Since its founding, Uniphase has shipped over one
million lasers and is a supplier of laser subsystems for OEMs in the
biotechnology, industrial process control, semiconductor wafer inspection, and
graphics and printing markets.
The Company's strategy is to leverage its core competencies in laser
technology to develop highly focused and differentiated applications where there
is a convergence of market need and optoelectronic technology. The Company
extended its optoelectronic product offerings by acquiring Uniphase
Telecommunications Products, Inc. ("UTP") in May 1995. UTP designs, develops,
manufactures and markets high-speed external modulators and transmitters for
fiber optic networks in the long-haul telecommunications and cable television
("CATV") industries. The UTP modulator and transmitter technology allow for more
telecommunication information to travel longer distances through a fiber optic
cable. These UTP products used in conjunction with the wavelength division
multiplexing allows the telecommunication industry to increase capacity of a
fiber route up to sixteen times by sending multiple signals through a single
optical fiber. The UTP products are also used in the CATV industry to allow
signal transmission over long distances and higher fidelity quality. In May
1996, the Company acquired two affiliated companies, GCA Fibreoptics Ltd.
("GCA") and Fiberoptic Alignment Solutions, Inc. ("FAS") which the Company
operates as a division under the name of UTP Fibreoptics ("UFP"). UFP custom
packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic
networks for local telecommunications and data communications. In March 1997,
the Company acquired the net assets of Uniphase Laser Enterprise ("ULE") from
IBM Corporation's ("IBM") Zurich Research Laboratory in Switzerland. ULE
designs, develops and manufactures the semiconductor chip used in erbium doped
fiber amplifiers ("EDFA"). The ULE pump lasers are key components of optical
amplifiers used by the telecommunications and CATV markets. These optical
amplifiers allow optical signals to be transmitted over twice the distance of
optoelectronic regenerators and are utilized in the CATV and telecom systems.
The acquisitions of UFP and ULE expands the Company's presence in the
optoelectronic communications markets.
The Company's knowledge of laser technology enabled it to introduce an
optoelectronics application for the semiconductor capital equipment industry,
the Ultrapointe laser imaging system ("Ultrapointe System"), in June 1993. The
Ultrapointe System works in conjunction with automated inspection systems from
vendors such as KLA-Tencor Corporation ("KLA-Tencor," formerly known as KLA
Instruments and Tencor Instruments prior to their merger in fiscal 1997) to
enable semiconductor manufacturers to more accurately identify and classify
defects. This defect examination and analysis procedure enables semiconductor
manufacturers to improve yields by identifying and containing process problems.
In May 1996, the Company introduced its IdentifierTM software product, an
optional feature that provides automated defect classification ("ADC")
capability for Ultrapointe Systems. Working in conjunction with the Ultrapointe
System, the IdentifierTM software automates the defect classification process,
thereby improving the precision and repeatability of defect classification. In
July 1997, Ultrapointe and KLA-Tencor signed a new OEM agreement, that
superceded all previous agreements, to be the exclusive reseller of the
Ultrapointe System and ADC.
COMPANY STRATEGY
The Company seeks to leverage its expertise in optoelectronics to develop
highly focused and differentiated applications where there is a convergence of
market need and optoelectronic technology. Uniphase seeks
1
3
to integrate its strengths in photonics, electronics and software development to
provide innovative and cost effective solutions to its customers. The key
elements of Uniphase's business strategy are as follows:
- Capitalize on Expertise in Laser Technology and Laser
Manufacturing. Since its inception in 1979, Uniphase has sold over one
million lasers to OEM customers. The Company is currently developing
solid state lasers for its existing OEM customers and new applications.
In this regard, Uniphase has commercially introduced a series of green
wavelength solid state microlasers and a series of continuous wave and
pulsed infrared solid state lasers. In addition, the Company is in the
late stage of development of blue wavelength solid state microlasers. The
Company believes that it is well positioned to continue development of
and penetrate the market for solid state lasers, which the Company
believes will be the primary commercial laser technology in the future.
- Offer Applications Differentiated by Optoelectronic Technologies. The
Company's expertise in laser technology has enabled it to successfully
introduce and market applications products in the semiconductor capital
equipment and telecommunications equipment markets. The Company's
Ultrapointe Systems utilize high resolution laser imaging systems for the
examination and analysis of wafer defects that are as small as 0.1
micron. The Company also develops and produces optical external
modulators and associated transmitters for fiberoptic CATV transmission
systems as well as modulators for long haul fiber optic digital
transmission. The Company intends to offer custom packaged laser diodes
and photodetectors for the efficient transmission of voice, data and
video across local fiber optic systems. The Company also designs,
manufactures, and markets pump lasers for optical amplifiers used in
fiber optic telecommunications and CATV systems.
- Provide Cost-Effective, Demand-Driven Solutions to its OEM Customers. The
Company seeks, through close relationships, to understand its customers'
needs at an early stage in the customers' product development cycles and
to design its laser subsystems and telecommunications equipment products
to meet these specific needs. The Company focuses on selling its
subsystems to customers at the design-in phase of a product, creating the
potential for recurring sales throughout a product's life. Following
design-in of its products, the Company shifts its focus to obtaining
manufacturing efficiencies, quality enhancements and cost reductions
during the product life.
- Maintain Industry and Customer Diversity. Uniphase sells its laser
subsystems to numerous OEMs in the biotechnology, measurement systems,
semiconductor equipment and graphics and printing system industries,
which reduces the Company's vulnerability to a downturn in any specific
industry or company. The Company has also increased the diversity of its
industry and customer base by leveraging its expertise in laser
technology to develop products for the semiconductor capital equipment
and telecommunications equipment markets.
PRODUCTS AND MARKETS
The Company offers optoelectronic products in three principal product
families: laser subsystems, semiconductor capital equipment and fiber optic
telecommunications equipment products. The Company's laser subsystems were the
Company's initial product offering and these operations have enabled the Company
to invest in the further development of its laser technology and to offer new
applications products. In fiscal 1994, the Company first shipped its Ultrapointe
System for defect examination and analysis of semiconductor wafers. In May 1995,
the Company acquired UTP to provide high-speed external modulators and
transmitters for the fiber optic networks in the long-haul telecommunications
and CATV industries. In May 1996, the Company acquired UFP, which custom
packages laser diodes, LEDs and photodetectors for OEMs for use in fiber optic
networks for local telecommunications and data communications. In March 1997,
the Company
2
4
acquired ULE to manufacture semiconductor chips used in the optoelectronic
communications market. The following table sets forth the Company's net sales by
product family in fiscal years 1997 and 1996:
NET SALES
FISCAL YEAR ENDED
JUNE 30,
--------------------
PRODUCT CATEGORY 1997 1996
------------------------------------------------------ -------- -------
(IN THOUSANDS)
Laser Subsystems...................................... $ 39,894 $36,565
Semiconductor Capital Equipment....................... 15,366 17,584
Telecommunications Equipment.......................... 51,706 14,924
-------- -------
$106,966 $69,073
======== =======
LASER PRODUCTS
Background
Today, lasers are used in a variety of applications in the biotechnology,
semiconductor, consumer electronics, graphic arts and industrial process control
and measurement industries. For example, in the biotechnology field, lasers are
incorporated in flow cytometers, which identify and analyze biological cells, in
DNA sequencers, which measure and identify DNA patterns, and in certain surgical
instruments. In the semiconductor field, lasers are used to perform automated
test and measurement functions. In consumer electronics markets, lasers are an
enabling technology in laser printers and compact disc players. In the
industrial process control and measurement field, lasers are used for bar code
scanning.
The principal factors that distinguish different types of lasers and
determine the particular laser suitable for a specific application are
wavelength (color), cost, operating life and output power, which is measured in
terms of watts ("W") or milliwatts ("mW"). Lasers are capable of emitting light
from low frequency, long wavelength (greater than 700 nm) infrared light through
the visible spectrum to high frequency, short wavelength (less than 400 nm)
ultraviolet light. For example, the wavelength of the laser is of key importance
in causing the fluorescence of dyes in biotechnology applications. In addition,
laser light at shorter green and blue wavelengths is capable of being focused to
smaller, more intense points of light, enabling higher resolution optoelectronic
applications, such as semiconductor wafer inspection.
Four types of lasers commonly available today are gas, liquid,
semiconductor diode and solid state, each of which derives its classification
from the lasing material it uses. Examples of gas lasers include argon lasers
used for biotechnology applications and carbon dioxide lasers used for
industrial welding applications. Liquid dye lasers are sold primarily in
research markets. Semiconductor diode lasers are used in CD players and in
telecommunications equipment.
The Company believes that solid state lasers will ultimately address all of
the applications currently served by gas lasers and that new applications for
lasers, such as marking and micromachining, will be made possible by solid state
technology. Solid state lasers use a solid material such as crystal, glass or
certain fibers as their lasing medium and, in some cases, use a semiconductor
diode laser as the energy source to stimulate their lasing medium. While
infrared solid state lasers are commercially available, shorter wavelength green
and blue solid state lasers have been commercialized on a very limited basis to
date due to cost and performance issues. The Company believes that further
development of green and blue solid state lasers may lead to significant market
opportunities for these shorter wavelength laser subsystems. In order to provide
its customers with the benefits of the smaller size and the improved efficiency
of solid state lasers, the Company is developing microlaser products.
Laser Subsystems Markets and Products
Uniphase's principal laser subsystem products consist of air-cooled argon
gas laser subsystems, which generally emit blue or green light, Helium Neon
("He-Ne") laser subsystems, which generally emit red or green light and solid
state lasers, which generally emit infrared, blue or green light. These systems
consist of a combination of a laser head containing the lasing medium, power
supply, cabling and packaging, including
3
5
heat dissipation elements. Uniphase's principal laser subsystem products and
representative applications include:
LASER TYPE WAVELENGTH POWER PRICE RANGE(1) APPLICATIONS
----------------------- ------------ --------- ---------------- --------------------
Gas:
He-Ne 633 nm 1-25 mW $50-$1,500 CAE Photoplotting
Argon 458-515 nm 3-75 mW $2,500-$12,000 Capillary
Electrophoresis
Color Separation
Solid
State:
Microlaser 473-1064 nm 5-50 mW $4,000-$9,000 Direct-to-Plate
Printing
DNA Sequencing
Flow Cytometry
Particle Counting
Semiconductor Wafer
Inspection
Stablelight 1064 nm Up to 4W $15,000-$20,000 Spectrometry
- ---------------
(1) Product prices vary depending on order volume, power output and other
customer requirements and configurations.
The overall market for gas lasers is mature and is expected to decline as
technology transitions from conventional lasers, including gas and liquid, to
solid state lasers, which the Company expects to be the primary laser technology
in the future. In comparison to gas lasers, solid state lasers are smaller and
use less power. Sales of the Company's argon gas lasers have increased in recent
years primarily as a result of increased sales of such products for use in
biotechnology and semiconductor applications. Use of He-Ne gas lasers has
substantially declined as most customers are now using semiconductor diode
lasers to satisfy bar code scanning applications.
Uniphase introduced a series of green wavelength solid state microlasers in
May 1994. The Company is in the late stage of development of blue wavelength
solid state lasers and the Company has shipped such lasers to certain customers
for evaluation purposes. These products consist of a power supply and an
infrared diode laser coupled to a proprietary crystal structure contained in a
temperature controlled housing. The Company believes that these products will
ultimately address the principal markets currently served by Uniphase's argon
laser products. The Company also believes that the reduced size and power
requirements of these microlasers will permit new applications for these
products, although no assurance can be given that these microlasers will achieve
commercial acceptance for use in existing or any new applications.
Uniphase introduced a series of continuous wave and pulsed infrared solid
state laser systems at the Conference on Laser and Electro-Optics in May 1995.
These products consist of a power supply and a number of high power diodes or
diode arrays coupled to a proprietary crystal structure in a stable mechanical
structure. The continuous wave product, Stablelight, produces up to 4W of
infrared power and is principally used by customers in industrial process
control and measurement applications.
SEMICONDUCTOR CAPITAL EQUIPMENT PRODUCTS
Background
Technological advances and demands for increasing levels of performance
have led the semiconductor industry to develop more complicated devices with
increasingly smaller geometries. A current state-of-the-art microprocessor may
have four million transistors per square centimeter, four or five "wiring"
levels and require 400 process steps during its manufacture, providing ample
opportunities for particle contamination to occur on the wafer and cause
defects. As semiconductor feature sizes decrease, devices become increasingly
susceptible
4
6
to smaller defects during their manufacture. It has been estimated that 80% of
the loss of manufacturing yield is caused by particle contamination that occurs
on the wafer during the manufacturing process.
One of the semiconductor industry's responses to the increasing
vulnerability of semiconductor devices to smaller defects has been to employ
defect detection and inspection that is closely linked to the manufacturing
process. Semiconductor process engineers monitor their processes more closely,
identifying defects and their origins in order to reduce their recurrence and
maintain and improve process yields. Presently, automated inspection systems
such as those manufactured by KLA-Tencor are used on-line to detect and locate
defects as small as 0.1 micron. A single wafer may be inspected numerous times
during its progression through manufacturing. These on-line detection systems
use advanced image processing and innovative laser scanning technologies to
achieve high sensitivity and speed.
Detecting the presence of defects is only the first step in preventing
their recurrence. After detection, the defects must be examined in order to
identify their size, shape and the process step in which the defect occurred.
This examination is called "defect classification." The resulting description of
the defects is then added to a computer database. This database is used to
monitor defect trends and to pinpoint the sources of defects and contaminating
particles to specific process steps or pieces of equipment. Identification of
the sources of defects in the lengthy and complex semiconductor manufacturing
process has become essential for maintaining high yield production.
While automated inspection systems have progressed to being able to detect
submicron defects, the conventional optical microscopes that have traditionally
been used for defect classification are not capable of examining such defects.
With a state-of-the-art, conventional optical microscope, a 0.3 micron defect,
which is nearly the entire minimum feature size of today's microprocessor,
appears only as a dark speck. Further, certain types of defects that are
embedded in or under films created during gas phase semiconductor manufacturing
processes are not currently observable by such microscopes. Other very shallow
defects, which are often only 0.1 micron high and which may occur during the
chemical mechanical polishing ("CMP") process, are also not observable by
conventional microscopes.
The Ultrapointe System Solution
The Company established its Ultrapointe subsidiary in fiscal 1992 and began
shipping Ultrapointe Systems in fiscal 1994. The Ultrapointe System is a laser
imaging system that is capable of examining microscopic defects with the ease
and speed of conventional microscopes while also offering increased resolution
and the ability to provide three-dimensional ("3-D") images. This system
combines state-of-the-art high speed laser scanning technology, real-time
confocal imaging and digital image reconstruction to allow for 3-D imaging of
semiconductor defects as small as 0.1 micron. The Ultrapointe System works in
conjunction with automated inspection systems from vendors such as KLA-Tencor to
enable semiconductor manufacturers to more accurately identify and classify
defects. This defect examination and analysis procedure enables semiconductor
manufacturers to improve yields by identifying and containing process problems.
Ultrapointe Systems operate in the manufacturing cleanroom, adjacent to
automated inspection systems, and can in seconds produce detailed images of
defects even when they are very small or embedded or buried in films. The
Company believes that its Ultrapointe System is the only currently available,
non-destructive wafer inspection tool with increased resolution and 3-D imaging
capabilities that is capable of both examining certain sub-surface wafer defects
and accurately analyzing the sources of defects.
The Ultrapointe System utilizes an optical technique called scanning laser
confocal microscopy. This technique uses, through high power microscopic optics,
an argon laser as an intense light source to scan a wafer's surface numerous
times. The return signal from the laser is processed by the system's computer
workstation, which provides a complete topological image of the wafer's surface
at the system's console and can display in a high resolution format defects as
small as 0.1 micron. Typical magnifications afforded by Ultrapointe Systems
approximate 35,000x, as compared with conventional white light microscopes upper
magnification limits of approximately 6,000x. Through software developed by the
Company, the system's workstation can also evaluate and classify defects,
communicate with automated inspection systems and store images and other data.
5
7
The Ultrapointe System has a base list price of $368,000. The system can
also be tailored, through software, to interface with various automated
inspection systems and local area networks. The Ultrapointe System includes full
wafer automation and handling and a Silicon Graphics workstation. The images
available include a conventional, real time white light microscopy image, real
time laser confocal "slices" and a multiple slice top view of the wafer surface
and defect. The full resolving power of the laser images is available and
surface, embedded and buried defects can be viewed. The product includes
advanced two dimensional ("2-D") and 3-D imaging.
The Ultrapointe System currently requires a human operator to classify
defects. In May 1996, the Company introduced its first Identifier(TM) software
product, an optional feature using white light that provides automatic defect
classification capability for Ultrapointe Systems. Working in conjunction with
the Ultrapointe System, the Identifier(TM) software automates the defect
classification process, thereby improving the precision and repeatability of
defect classification. In December 1996, a laser image version of the
Identifier(TM) was introduced. The laser ADC product has improved classification
capabilities for more complex "metal" layers of semiconductor devices. The
ability to review defects using ADC software is becoming increasingly important
to semiconductor manufacturers as it facilitates defect classification without
direct operator evaluation at each defect site. This automation can improve
reliability and consistency by eliminating operator-induced variations. In
addition, such automation helps speed analysis of the vast amounts of defect
data and classifications necessary for yield enhancement programs. The Company
developed the Identifier(TM) software using technology licensed from ISOA, Inc.
and in cooperation with the semiconductor industry consortium, SEMATECH. The
Identifier(TM) has a base list price of $150,000.
In July 1997, the Company entered into a three-year agreement with
KLA-Tencor under which KLA-Tencor became the exclusive reseller for the
Company's Ultrapointe Systems and the Identifier(TM), the Company's ADC software
product. Under the Agreement, KLA-Tencor will distribute the Ultrapointe System
under its own label worldwide and has the responsibility for installation and
service of the systems it sells.
TELECOMMUNICATIONS EQUIPMENT PRODUCTS
Fiber optic cable is gaining widespread acceptance in upgrades and new
installations of CATV and telecommunications systems worldwide. The use of fiber
optic cable results in vastly improved performance, flexibility, reliability and
lower installation and operating costs when compared to traditional copper and
coaxial cable. Moreover, technological innovation and market forces are creating
increased demand for communication transmission systems with multiple delivery
capability and higher performance and reliability features. Further,
telecommunications interexchange carriers are being required to provide higher
speed data transmission over longer lengths of installed optical fiber between
electronic repeater stations. Due to the high cost of new fiber installations,
interexchange carriers seek to utilize the installed fiber base to the greatest
extent possible. In the CATV industry, consolidation has resulted in a smaller
number of multiple system operators controlling larger networks. These
operators, who compete with other technologies such as direct broadcast
satellite television, are upgrading their systems and seek economical solutions
that will increase their network flexibility and reliability. The Company
participates in these markets through its UTP, UFP and ULE subsidiaries.
UTP Background
The flexibility and performance of fiber optic systems has been enhanced
through the use of two types of signal encoding techniques: direct modulation
and external modulation. In direct modulation, the light output from a diode
laser is switched on and off to generate a signal, similar to the operation of a
flashlight. This frequent switching, however, causes wavelength instability,
which limits the distance of transmission before signal regeneration is
required. Further, the diode lasers used in direct modulation have limited power
and modulation rate, thereby constraining the performance of the signal
transmission system. In external modulation, the light output of a continuously
powered laser is switched in a separate crystal of lithium niobate. Light from
the laser travels along waveguides patterned into lithium niobate crystals and
electrical
6
8
signals applied to electrodes alongside the waveguides encode the signal onto a
light beam for transmission in the optical fiber. As compared to direct
modulation, external modulation has the following advantages:
- Longer Distances in Telecommunications. External modulators enable signal
transmission over longer distances in telecommunications systems before
signal regeneration is required. External modulation thereby reduces the
required number of expensive repeaters or amplifiers, which are a
significant cost in transmission systems.
- Higher Capacity in Telecommunications. External modulation is being used
by equipment suppliers that are developing transmission hardware
incorporating wavelength division multiplexing ("WDM"). WDM is capable of
increasing the capacity of a fiber route up to 16 times without upgrading
to more expensive electronic multiplexing/demultiplexing equipment. WDM
is compatible with the large installed base of fiber optic networks and
can be used to increase significantly the data carrying capacity of such
networks. External modulators also enable higher data rates (e.g. OC-192
or 10 Gbps) to be effectively transmitted over long distances.
- Longer Distances and Higher Fidelity in CATV. External modulators operate
at higher laser power and therefore allow signals to be transmitted over
longer distances without detection and retransmission. In addition,
external modulation provides inherently higher fidelity because of lower
laser noise and low noise susceptibility to optical system reflections,
such as those arising from existing fiber optic connections. External
modulators are fully compatible with CATV distribution systems that
utilize fiber optical amplifiers.
UTP Products and Markets
In May 1995, the Company purchased UTP, which designs, develops,
manufactures and markets high-speed external modulators and transmitters for
fiber optic networks in the CATV and telecommunications industries. The Company
acquired UTP as part of its strategy to pursue selected opportunities where
opto-electronic technology converges on specific market needs which have not
been adequately addressed by conventional electronic solutions.
The Company produces lithium niobate integrated optic circuits by using its
proprietary Annealed Proton Exchange (APE(R)) fabrication process. The Company
believes that this process produces modulators which can have higher optical
power handling, and can be fabricated into a bias free mode (advantageous for
digital systems) as compared with competing external modulators. The Company
also sells customized external modulators for a variety of customer
applications.
The Company's principal modulator products include:
TYPE WAVELENGTH APPLICATION
- ----------------------------------- ------------------- -----------------------------------
CATV Modulators.................... 1300 nm, 1550 nm CATV Super Trunk Transmitter
2.5 and 10 Gbps Digital
Modulators....................... 1300 nm, 1550 nm OC-48 and OC-192
Telecommunications, respectively
Microwave and Radio Frequency
Modulators....................... 1300 nm, 1550 nm Antenna Links and Radar
UTP began to supply turn-key externally modulated CATV transmitters to CATV
OEMs in September 1995. These transmitters incorporate a continuous-wave diode
laser, a lithium niobate modulator and patented electronic linearity and control
circuitry. The Company routinely customizes its transmitter to the
specifications of the OEM customer. The Company also resells optical fiber
amplifiers as part of providing complete optical transmission functionality to
OEMs.
The principal applications addressed by UTP products are as follows:
- Long-Haul Telecommunications. The principal long-haul telecommunications
application addressed by the Company is a 2.5 Gbps transmission system
for long distance telephone interexchange carriers. The Company's
external modulators are used in these systems to significantly increase
the space between repeaters in such systems. The Company's modulators
allow the transmission of up to 32,000
7
9
phone conversations over a single fiber to switching sites across
distances of up to 350 miles. In addition, the Company's external
modulators are well suited for WDM applications at 2.5 Gbps. In such
applications, multiple wavelength telecommunications signals are
transmitted over the same fiber, thereby multiplying the capacity of the
fiber cable system. Telecommunications customers are presently deploying
systems with up to 16 separate wavelengths in order to accommodate 40
Gpbs using UTP's OC-48 modulators. The Company is also developing a
higher speed modulator to provide similar capability at 10 Gbps (OC-192
data rate).
- Cable. The principal cable television applications addressed by the
Company are externally modulated transmitters for trunk-line
applications. These transmitters operate at the preferred optical
wavelength of 1550 nm. They incorporate high power (20 mw) diode lasers
and the Company's modulators to provide high optical powers for the
transmission of broadcast television signals over long distances. In
addition, they are compatible with existing optical amplifier technology,
which allows the transmission distance or the subscriber area to be
increased. The Company's modulated transmitters are designed for use in
broadband systems, are operational over bandwidths of up to 1 Ghz and are
compatible with hybrid fiber coax ("HFC") systems being developed by
certain telecommunications equipment providers for the transmission of
voice, data and video.
- Specialty Products and Markets. In May 1996, UTP entered into an
agreement with Sanders, a Lockheed Martin Company, to develop fiber optic
transmitters for the United States government to be installed on high
performance aircraft. Additional applications for the Company's
integrated optic modulators include fiber optic gyroscopes ("FOGs"),
analog RF fiber optic systems and laboratory and research and development
activities. The Company is a leading commercial supplier of
multi-function integrated optic signal processing chips for FOGs. FOGs
are intended for use in commercial aviation, military/aerospace and
industrial applications. The Company also offers a variety of integrated
optic modulators and switches for use at frequencies to 20 Ghz that are
being used in a large variety of industrial, government and university
research and development programs.
UFP Products and Markets
In May 1996, the Company acquired UFP, which custom packages laser diodes,
LEDs and photodetectors for OEMs for use in fiber optic networks. UFP uses its
proprietary technologies of epoxy-based attachment and laser welding to attach
fiber ("pigtailing") to these optoelectronic components in a variety of
configurations to meet the specific needs of its OEM customers.
The principal applications addressed by UFP are as follows:
- Data communications. The ever-increasing use of computer networks is
fueling a growth in fiber data communications systems. Fiber offers
advantages over copper-wire links that include longer distance
transmission, higher data rates, ease of multiplexing, and immunity from
electromagnetic interference. UFP offers custom packaged optical sources
and detectors for a variety of fiber-based data communications
applications such as single-fiber Ethernet and Token Ring.
- Local telecommunications. Low-cost diodes are used in the feeder and loop
portions of the local telephone network to accommodate various data
rates. The Company supplies custom packaged components to
telecommunications equipment manufacturers. For example, UFP supplies
custom laser-diode submodules for use as optical sources and detectors in
SONET OC-3 (155 Mbps) networks.
- Specialty Markets. UFP products are well suited for several specialty
markets such as fiber optic test and measurement equipment, fiber optic
sensors and military and aerospace data communications applications. For
example, the Company pigtails red diode lasers for use in hand-held fiber
optic fault locators.
8
10
ULE Background
A major enhancement of fiber optic systems is due to the development and
deployment of the optical fiber amplifier. This optical device amplifies
in-coming optical signals without having to convert them to electrical signals,
as was the case with the older-generation electronic regenerators. These optical
amplifiers are higher performance and lower cost than regenerators. They operate
in the 1550 nm wavelength range where optical fiber has its lowest transmission
loss.
An optical amplifier is composed on a fiber with specially introduced
impurities (erbium), a diode laser for pumping (energizing) the fiber and a
variety of other components such as couplers, isolators and control electronics.
The key components are the fiber and pump laser, and very high reliability had
to be established for each of these new components. The preferred pump laser is
an GaInAs/GaAs structure operating at 980 nm.
Advantages of optically amplified fiber communication systems, compared to
their counterparts using electronic regenerators are:
- Longer distances between amplifiers. Optical amplifiers can span over
twice the distance achievable with optoelectronic regenerators. They also
operate at the most transparent wavelength range of optical fiber.
- Flexible and upgradeable signal content. Optical amplifiers are bit-rate
transparent; for example 155 Mb/s and 2.5 Gb/s data can equally well be
passed through the same amplifier. They also can simultaneously
accommodate multiple wavelengths in a WDM system. Amplifiers are being
deployed for CATV as well as telecom systems.
- Lower cost equipment. Optical amplifiers used in high speed WDM systems
offer considerable savings in regeneration than a comparable electrically
regenerated system.
ULE Products and Markets
In March 1997, the Company acquired ULE, which designs, develops,
manufactures and markets pump lasers for optical amplifiers used in fiber optic
telecommunications and CATV systems. This acquisition enables the Company to
provide an additional key component to high-performance fiber optic systems.
ULE produces pump lasers in GaInAs/GaAs materials. These lasers operate at
the preferred pump wavelength of 980 nm. ULE invented and brought to
manufacturing a laser fabrication process that incorporates a special
laser-facet passivation technique (referred to as E2) that provides the
necessary laser lifetimes required to meet telecommunication-equipment
reliability. ULE supplies these lasers in chip form and on submounts to
companies that package them for incorporation into amplifiers by telecom OEMs.
These lasers operate at a variety of power levels and wavelengths.
The principal applications addressed by ULE products are as follows:
- Long-haul telecommunications. Optical amplifiers are commonly used into
today's fiber systems that span more than 150 km and operate in the
low-loss 1550 nm wavelength range. The amplifiers are used in high-speed
(OC-48) and WDM systems (up to 16 wavelengths) ULE provides pump for the
majority of amplifiers used today in terrestrial applications.
- Cable. Optical amplifiers are widely used in the trunking (backbone)
portion of CATV networks. These trunking lines are typically 50-100 km in
length, operate at 1550 nm, and achieve higher signal fidelity by
incorporating the amplifiers. Amplifiers are beginning to be used for the
distribution portion of some CATV networks, especially in international
deployments. ULE provides high-power (200 mW) pumps for these amplifiers.
SALES AND MARKETING
Uniphase markets its laser subsystem products principally to OEMs through
its own sales force in the United States, United Kingdom and Germany and through
a worldwide network of representatives and
9
11
distributors to service smaller domestic accounts, including those in the
research and education markets. The Company's sales and marketing strategy for
its laser subsystem products is to establish long term relationships with its
OEM customers through early design-in phase of its laser subsystems into
customers applications and through high levels of customer service and support.
The following chart sets forth the Company's principal OEM customers for laser
subsystems by application:
WAFER INSPECTION
BIOTECHNOLOGY INSTRUMENTS SYSTEMS GRAPHICS AND PRINTING SYSTEMS
- ------------------------- ----------------- ------------------------------------------------
Applied Biosystems ADE Corporation Crosfield Electronics Ltd.
Beckman Instruments Nikon Corporation Gerber Systems Corporation
Coulter Corporation KLA-Tencor Optronics, a division of Intergraph Corporation
Molecular Dynamics Purup Pre-Press A/S
One laser subsystems customer, the Applied Biosystems Division of
Perkin-Elmer Corporation, accounted for approximately 10%, 12% and 12% of the
Company's net sales for fiscal years 1997, 1996, and 1995, respectively. In
addition, in fiscal 1996, KLA-Tencor (formerly known as Tencor) accounted for
13% of the Company's sales through the purchase of both laser subsystems and
Ultrapointe Systems. A reduction or delay in orders from this customer could
adversely affect the Company's results of operations.
In fiscal 1997, Uniphase marketed its Ultrapointe Systems through
KLA-Tencor's worldwide distribution channels and a network of four independent
sales representatives in the United States. In Japan, the Company had a
distribution agreement with KLA-Tencor and Innotech Corporation for sales to
Japan's semiconductor industry. In Europe and the Pacific Rim, the Company
distributes its products through KLA-Tencor; however, the Company has the right
to market its products through its own distribution channels. In July 1997,
Ultrapointe and KLA-Tencor signed a new OEM agreement, that superceded all
previous agreements, to be the exclusive reseller of the Ultrapointe System and
ADC software. Therefore, the distribution agreement with Innotech Corporation
and the four independent sales representation agreements were terminated by
Ultrapointe effective September 1997 and October 1997, respectively.
As of June 30, 1997, the Company had sold 117 Ultrapointe Systems in the
United States, Europe, Japan and the Pacific Rim. Customers for the Company's
Ultrapointe System include:
American Microsystems Microunity
Analog Devices Motorola*
Applied Materials Philips Semiconductors*
Digital Equipment Corporation* Samsung*
Fujitsu, Ltd.* SEMATECH
IBM Corporation* Sony Corporation
Intel* TSMC*
LSI Logic Corporation* Toshiba*
Lucent Technologies* Texas Instruments
L.G. Semicon VLSI Technology*
Matsushita Electric* VTC
Micron Technology* Yamaha Corporation
- ---------------
* Indicates customers that have purchased multiple Ultrapointe Systems.
10
12
The Company markets its telecommunications equipment products to OEMs
through its own direct sales forces in Bloomfield, Connecticut; Chalfont,
Pennsylvania; Switzerland; Germany and Scandinavia. In addition, UTP sells its
products through distributors in select European countries, Japan, Taiwan, Korea
and India. Customers for the Company's telecommunications equipment products
include:
Alcatel Lasertron
Ciena Nortel
General Instruments Scientific Atlanta
GPT TRW
CUSTOMER SUPPORT AND SERVICE
The Company believes that a high level of customer support is necessary to
successfully develop and maintain long term relationships with its OEM customers
in its laser subsystems and telecommunications equipment businesses. This close
relationship begins at the design-in phase and is maintained as customer needs
change and evolve. The Company provides direct service and support to its OEM
customers through its offices in the United States. The Company's European laser
subsystem customers are serviced through its sales and support offices in the
United Kingdom and Germany. In Japan, the Company's laser subsystems
distributor, Autex, assists in performing support and service functions. The
Company provides support through both on-site customer service and telephone
support from its various facilities that perform sales and service functions.
The Company generally warrants all of its laser products for a period of one
year from the date of shipment. Certain argon lasers carry warranties based on
hours of use.
A high level of customer support is also necessary when providing
production instrumentation for the semiconductor industry. KLA-Tencor and all
distributors of Ultrapointe Systems are responsible for sales, installation,
warranty and post-warranty support. Ultrapointe Systems generally carry a
one-year warranty from the date of installation or fifteen months from shipment,
whichever occurs first. Service contracts are available for system support after
the warranty period.
RESEARCH AND DEVELOPMENT
During fiscal years 1997, 1996, and 1995, Uniphase spent $9.3 million, $5.8
million, and $3.7 million, respectively, on research and development. In fiscal
1997, 1996 and 1995, Uniphase incurred charges totaling $33.3 million, $4.5
million and $4.5 million for acquired in-process research and development, which
were incurred in connection with the acquisition of ULE in fiscal 1997, UFP in
fiscal 1996 and UTP in fiscal 1995. In fiscal 1997, the Company's laser research
and development efforts focus primarily on the continued development of solid
state lasers. These programs are supported by a $1.4 million award, which
expires in December 1998 from the Advanced Technologies Program of the
Department of Commerce. The Company also has development and licensing
agreements with Stanford University and the University of St. Andrews, Scotland
which give the Company the right to manufacture and sell certain next generation
laser products being developed by these universities. If the Company
manufactures such products, it will be required to pay the universities certain
royalties based on sales of the products.
The Company continues to devote research and development resources to its
Ultrapointe Systems product line. These efforts focus on the Company's
Identifier(TM) software product and enhancement of laser images. In addition to
the Identifier(TM), the Company is also exploring a number of methods to improve
the resolution of the scanning laser confocal microscopy technique used in the
Ultrapointe System and to accommodate future generations of higher density
semiconductor devices. Ultrapointe's efforts regarding the next generation of
semiconductor devices have also been in the handling of larger wafers (300 mm in
diameter).
The Company is developing new and enhanced telecommunications equipment
products and enhancing its manufacturing capability for telecommunications
equipment products. For example, higher performance modulators and transmitters
are under development, as are advanced multi-gigabit modulators. In
manufacturing, the Company is developing improved CAD design tools and advanced
modulator packages. The
11
13
Company also participates in two national consortia: the Analog Optoelectronics
Module Consortium, which seeks to develop new and cost-effective RF and
microwave transmitters and receivers, and the National Transparent Optical
Network Consortium, which is involved in advanced high capacity WDM fiber optic
communications components and networks. The Company is also committed to the
success of its ULE products by acquiring capital equipment in support of the
research and development. ULE is currently focusing its research and development
effort on the packaging of higher powered pump lasers and pump lasers at other
frequencies.
MANUFACTURING
The Company manufactures its solid state lasers subsystem products and
argon laser subsystems and related power supplies at its San Jose, California
facility and its He-Ne lasers at its Manteca, California facility. The Company
assembles and tests its Ultrapointe Systems and manufactures initial systems of
its microlasers at its San Jose, California facility. The Company's modulator
products are manufactured at its facility in Bloomfield, Connecticut and its
transmitters are manufactured at its facility in Chalfont, Pennsylvania. UFP
products are manufactured at the Company's facilities in Witney, United Kingdom.
ULE lasers are manufactured in Zurich, Switzerland. The Company has purchasing,
materials management, assembly, final testing and quality assurance functions at
each location for the products that are manufactured at that facility.
The manufacture of the Company's laser subsystems, Ultrapointe Systems and
telecommunications equipment products is a highly complex and precise process,
requiring production in a highly controlled environment. The Company maintains a
2,000 square foot class 100 clean room in which all Ultrapointe System assembly
takes place. Systems are tested and then packaged for direct shipment into a
customer's clean room. Changes in the Company's or its suppliers' manufacturing
processes or the inadvertent use of defective or contaminated materials by the
Company or its suppliers could adversely affect the Company's ability to achieve
acceptable manufacturing yields and product reliability. To the extent the
Company does not achieve such yields or product reliability, its operating
results and customer relationships would be adversely affected.
The raw materials and sub-components which the Company requires for the
manufacture of its products are generally available from several sources. The
Company purchases some raw materials and components from single sources, but has
no reason to believe it could not purchase such materials and components from
alternative sources of supply on comparable terms. The Company obtains all the
robotics, workstations, and many optical components used in its Ultrapointe
Systems from Equipe Technologies, Silicon Graphics, Inc., and Olympus
Corporation, respectively. The Company currently utilizes a sole source for the
crystal chip sets incorporated in its solid state microlaser products and
acquires its pump diodes for use in its solid state laser products from Philips
and Opto Power Corporation. Certain of these companies also manufacture products
that compete with those of the Company. The Company obtains lithium niobate
wafers and specialized fiber components used in its telecommunications products
from primarily Crystal Technology, Inc. and Fujikura Ltd., respectively. From
time to time, the Company has experienced delays in obtaining raw materials and
components. However, to date such delays have not materially affected its
operations. The Company does not have long-term volume purchase agreements with
any of these suppliers, and no assurance can be given that these components will
be available in the quantities required by the Company, if at all.
COMPETITION
The industries in which the Company sells its products are highly
competitive. Uniphase's overall competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service and quality of its manufacturing processes, the compatibility
of its products with existing laser systems and Uniphase's ability to
participate in the growth of emerging technologies, such as solid state lasers.
In the argon laser market, Uniphase primarily competes with American Laser,
Coherent, Ion Laser Technology, NEC, Omnichrome, Spectra-Physics, Toshiba and
Carl Zeiss. In the He-Ne laser market, Uniphase considers Melles-Griot, NEC and
Carl Zeiss to be its primary competitors. In the solid state laser
12
14
markets, Uniphase's competitors include Coherent, Hitachi, Lightwave, Opto Power
Corporation, Philips, SDL, Inc., Siemens, Sony and Spectra-Physics.
Significant competitive factors in the market for Ultrapointe Systems
include specific system performance, cost of ownership, support and
infrastructure and the ability to interface to existing automated inspection
systems and local area networks. Ultrapointe Systems compete with the following
three types of devices: scanning electron microscopes, conventional white light
microscopes and laser confocal microscopes. The Company believes that its
principal competitors include Amray, Hitachi, JEOL, Kinetek, Kensington,
Lasertech, Leica, Nidek, Nikon, Stahl Research and Carl Zeiss.
Competitive factors in the market for the Company's telecommunications
equipment products include price, product performance and reliability, the
capability to provide strong customer support and service, customer
relationships and the breadth of product line. In this market, the Company faces
competition from companies that have substantially greater financial,
engineering, research, development, manufacturing, marketing, service and
support resources, greater name recognition than the Company and long-standing
customer relationships. With respect to modulator products for CATV and
telecommunications equipment suppliers, the Company's competitors include Lucent
Technologies, Crystal Technology, Inc., Fujitsu, Integrated Optical Components,
Ltd., and Sumitomo Cement Opto Electronics Group. With respect to CATV 1550 nm
transmitters for supply to OEMs, the Company's competitors include AEL, Harmonic
Lightwaves, Kablerhydt, Ortel, Synchronous Communications and PAi. Other CATV
equipment suppliers may also enter this market. With respect to laser diode
products for data communications and local telecommunications equipment
suppliers, the Company's competitors include Oz Optics and SDL-Optics as well as
larger optoelectronic suppliers such as AMP and Hewlett-Packard. ULE competes
with SDL, Inc. in the 980-nm-pump-diode laser market. Potential new technologies
may also emerge to compete with the Company's products, such as
electro-absorption modulators that are being introduced for long-haul
telecommunications.
PATENTS AND PROPRIETARY RIGHTS
The Company holds 32 United States patents and certain corresponding
foreign patents on the technologies related to its products and processes. The
United States patents expire on dates ranging from 1999 to 2015. The Company has
applied for additional patents related to its solid state laser products, its
Ultrapointe Systems (five of which were recently issued) and its
telecommunications products. The Company has also acquired several patent
licenses involving areas such as end-pumped solid state lasers, diode-pumped
blue light lasers and waveguides.
The laser, semiconductor equipment, CATV and telecommunications industries
in which the Company sells its products are characterized by frequent litigation
regarding patent and other intellectual property rights. Numerous patents in
these industries are held by others, including academic institutions and
competitors of the Company. Such patents could inhibit the Company's ability to
develop or sell new products for such markets. From time to time, the Company
has received notices claiming that it has infringed third-party patents or other
intellectual property rights. While in the past licenses generally have been
available to the Company where third-party technology was necessary or useful
for the development or production of the Company's products, there can be no
assurance that licenses to third-party technology will be available on
commercially reasonable terms, if at all. Generally, a license, if granted,
would include payments by the Company of up-front fees, ongoing royalties or a
combination thereof. There can be no assurance that such royalty or other terms
would not have a significant adverse impact on the Company's operating results.
The Company is a licensee of a number of third party technologies and
intellectual property rights and is required to pay royalties to these third
party licensors on certain of its products, including its Ultrapointe Systems
and its solid state lasers. In fiscal 1997 and 1996, the Company expensed $1.4
million and $1.3 million, respectively, in license and royalty fees primarily in
connection with its gas laser subsystems. In addition, there can be no assurance
that third parties will not assert claims against the Company with respect to
its existing products or with respect to future products under development by
the Company. In the event of litigation to determine the validity of any
third-party claims, such litigation could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such
13
15
litigation is determined in favor of the Company. In the event of an adverse
result in any such litigation, the Company could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the technology which is the subject of the litigation. There can be no
assurance that the Company would be successful in such development or that any
such licenses would be available to the Company. In the absence of such a
license, the Company could be enjoined from future sales of the infringing
product or products. In fiscal years 1992 and 1993, the Company incurred
substantial legal expenses in connection with a patent infringement action
relating to the Company's current gas laser subsystems brought by
Spectra-Physics Lasers, Inc. ("Spectra-Physics"). While the Spectra-Physics case
has since been settled, no assurance can be given that, in the future, the
Company will be able to avoid similar actions by competitors or others or not be
forced to initiate its own actions to protect its proprietary position.
BACKLOG
Backlog consists of written purchase orders for products for which the
Company has assigned shipment dates within the following 12 months. As of June
30, 1997 the Company's backlog was approximately $34.2 million, as compared with
a backlog of approximately $20.7 million at June 30, 1996. Orders in backlog are
firm, but are subject to cancellation or rescheduling by the customer. Because
of possible changes in product delivery schedules and cancellation of product
orders and because the Company's sales will often reflect orders shipped in the
same quarter that they are received, the Company's backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period.
Certain of the Company's laser subsystems customers are adopting "just in time"
techniques with respect to ordering the Company's products, which will cause the
Company to have shorter lead times for providing products. Such shorter lead
times are likely to result in lower backlog.
EMPLOYEES
At June 30, 1996, the Company had a total of 597 full-time employees
worldwide, including 67 in research, development and engineering, 45 in sales,
marketing and service, 418 in manufacturing, and 67 in general management,
administration and finance. The Company intends to hire additional personnel
during the next 12 months in each of these areas. The Company's future success
will depend in part on its ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. There can be no assurance that the
Company will be successful in attracting and retaining such personnel. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage, slowdown or
strike. The Company considers its employee relations to be good.
RISK FACTORS
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including but not limited to statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Actual results could differ materially from those projected in any
forward-looking statements as a result of a number of factors, including those
detailed in this "Risk Factors" portion as well as those set forth elsewhere in
this Report on Form 10-K. The forward-looking statements are made as of the date
hereof and the Company assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ materially
from those projected in the forward-looking statements.
MANAGEMENT OF GROWTH; UFP AND ULE ACQUISITIONS
The Company has experienced recent growth through increased levels of
operations in its existing businesses, the acquisition of UTP in May 1995, the
acquisition of UFP in May 1996 and the acquisition of ULE in March 1997. The
Company is devoting significant resources to develop new solid state lasers for
OEM customers, to improve products and increase market penetration of its
Ultrapointe Systems and to increase its penetration of the CATV and
telecommunications industries. In addition, the Company is now increasing its
14
16
marketing, customer support and administrative functions in order to support an
increased level of operations primarily from sales of its telecommunications
equipment products. No assurance can be given that the Company will be
successful in creating this infrastructure or that any increase in the level of
such operations will justify the increased expense levels associated with these
businesses.
In May 1996, the Company acquired UFP. As a result of acquiring UFP, the
Company has entered the local telecommunications and data communications market
in which it had no previous experience, and has expanded its employee base. The
success of the UFP acquisition will be dependent on the Company's ability to
integrate UFP into its existing operations. The Company's ability to manage UFP
will be complicated by the geographical distance of UFP locations in the United
Kingdom and in Batavia, Illinois. There can be no assurance that the operations
of UFP will not strain the Company's available management, manufacturing,
financial and other resources.
In March 1997, the Company acquired ULE. As a result of acquiring ULE, the
Company has gained access to a proven semiconductor based laser application for
use in telecommunications. The success of the ULE acquisition will be dependent
upon the Company's ability to integrate ULE 980 nm lasers and future products
used in erbium doped fiber amplifiers (EDFA) and to many major telecommunication
equipment manufacturers. There can be no assurance that the ULE operations will
not strain the Company's available management, manufacturing, financial and
other resources.
The Company also made capital expenditures in fiscal 1996 to acquire
certain properties in San Jose, California totaling 109,000 square feet, which
included land, buildings and improvements for an aggregate purchase price of
approximately $11.0 million and continues to invest in property, plant and
equipment needed for its business requirements, including adding to
manufacturing capacity throughout the Company. Any failure to utilize these
areas in an efficient manner could have a material adverse effect on the
Company.
The Company currently has no commitments with respect to any future
acquisitions. The Company, however, frequently evaluates the strategic
opportunities available to it and may in the future pursue investments in or
acquisitions of additional complementary products, technologies or businesses.
Such acquisitions by the Company may result in the diversion of management's
attention from the day-to-day operations of the Company's business and may
include numerous other risks, including difficulties in the integration of the
operations and products, integration and retention of personnel of the acquired
companies and certain financial risks. Further acquisitions by the Company may
result in dilutive issuances of equity securities, the incurrence of additional
debt, reduction of existing cash balances, amortization expenses related to
goodwill and other intangible assets and other charges to operations that may
materially adversely affect the Company's business, financial condition or
operating results.
DIFFICULTIES IN MANUFACTURE OF THE COMPANY'S PRODUCTS
The manufacture of the Company's products involves highly complex and
precise processes, requiring production in highly controlled and clean
environments. Changes in the Company's or its suppliers' manufacturing process
or the inadvertent use of defective or contaminated materials by the Company or
its suppliers could adversely affect the Company's ability to achieve acceptable
manufacturing yields and product reliability. In addition, UTP has previously
experienced certain manufacturing yield problems that have materially and
adversely affected both UTP's ability to deliver products in a timely manner to
its customers and its operating results. During the fourth quarter of fiscal
1997, the Company launched an additional production facility at UTP's
Bloomfield, Connecticut facility. No assurance can be given that the Company
will be successful in manufacturing UTP products in the future at performance or
cost levels necessary to meet its customer needs, if at all. In addition, UTP
established a transmitter production facility in Chalfont, Pennsylvania in March
1996 and consolidated the transmitter production line previously located in
Bloomfield, Connecticut into this facility in April 1996. The Company has no
assurance that this facility will be able to deliver the planned production
qualities of transmitters to customers specifications at the cost and yield
levels required. To the extent the Company or UTP does not achieve and maintain
yields or product reliability, the Company's operating results and customer
relationships will be adversely affected.
15
17
The Company is in the process of relocating the ULE operation from its
current facility at the IBM Research Laboratories, which has been leased from
IBM through 1999, to a larger manufacturing facility in Binz, Switzerland. The
relocation of ULE will involve the establishment of a new manufacturing,
research and development, sales and administration facility. Once the ULE
relocation has been completed, the production line will need to be requalified
to assure the high quality demanded by the industry is met by ULE products. ULE
will also need to produce its products at a sufficient capacity and yield. There
can be no assurance that the relocation will be successfully completed by the
time the IBM lease expires or that qualified product can be produced at
sufficient yields to successfully compete with other comparable products or
technologies. The new facility will also need to develop new products to meet
the growing demand for better and faster telecommunication products. There can
be no assurance that these new products can be developed in a timely manner to
meet the market needs, or if developed, that a market for such products
developed will be readily available to the Company. To the extent ULE or the
Company fails to recognize and resolve problems of producing its current and
future products, the results could have an adverse effect on the Company's
ability to service its customers. See also the "Gallium Arsenide" Risk Factor.
The Company's UTP products continue to receive pressure from its customers
to reduce cost and increase capacity. In an effort to meet the Company
customers' needs, the Company intends to increase manufacturing capacity and
reduce production costs by implementing an automated manufacturing system for
the production of its OC-48 modulators. Any delay in increasing production
through the completion of the automation of the manufacturing could materially
effect UTP's and the Company's profit margin and net income. There can be no
assurance the automated manufacturing will be completed in time to meet the
demands of the market. The Company further intends to invest resources in
capital equipment and research and development for the production of the next
generation of UTP modulators, the OC-192. There can be no assurance UTP will be
able to develop the OC-192 modulators to meet customers specifications, or if
developed, that these modulators will be accepted by the market.
GALLIUM ARSENIDE
Gallium Arsenide, referred to as GaAs, is a semiconductor material that has
an electron mobility that is up to five times faster than silicon. As a result,
it is possible to design GaAs circuits that operate at significantly higher
frequencies than silicon circuits. At similar frequencies, GaAs circuits will
produce higher signal strength (gain) and lower background interference (noise)
than silicon circuits, permitting the transmission and reception of information
over longer distances. GaAs circuits can also be designed to consume less power
and operate more efficiently at lower voltages than silicon circuits.
The fabrication of integrated circuits, particularly GaAs devices such as
those sold by ULE is a highly complex and precise process. Minute impurities,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, wafer breakage or other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer to be
nonfunctional. Management considers wafer yields in excess of 18% achieving
internal lot validation criteria to be acceptable. ULE has in the past and may
be in the future experience lower than expected production yields, which could
delay product shipments and adversely affect gross margins, and there can be no
assurance that ULE will be able to maintain acceptable yields in the future.
Because the majority of ULE manufacturing costs are relatively fixed,
manufacturing yields are critical to the results of operations. To the extent
ULE does not achieve acceptable manufacturing yields or experiences product
shipment delays, its business, operating results and financial condition could
be materially and adversely affected.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
The Company's Ultrapointe Systems and a portion of its laser subsystems
businesses depend upon capital expenditures by manufacturers of semiconductor
devices, including manufacturers that are opening new or expanding existing
fabrication facilities, which, in turn, depend upon the current and anticipated
market demand for semiconductor devices and the products utilizing such devices.
The semiconductor industry is highly cyclical, and historically has experienced
periods of oversupply, resulting in significantly reduced demand for capital
equipment. Recently, the semiconductor industry has experienced a downturn which
has
16
18
led certain of the Company's customers to delay or cancel purchase of the
Company's Ultrapointe Systems. Results of operations for fiscal 1997, include
sales of Ultrapointe product totaling $15.4 million, down from $17.6 million in
fiscal 1996. The Company believes the short-term outlook for Ultrapointe
products is improving as evidenced by an increase in backlog from 12 systems at
the end of the third quarter of fiscal 1997 to 19 systems at the end of fiscal
1997. There can be no assurance that the Company's operating results will not be
materially and adversely affected by these factors. Furthermore, there can be no
assurance that the semiconductor industry will not experience further downturns
or slowdowns in the future or that the current backlog in Ultrapointe products
will result in actual sales or such backlog is indicative of a meaningful trend,
which may materially and adversely affect the Company's business and operating
results.
RISKS FROM CUSTOMER CONCENTRATION
A relatively limited number of OEM customers historically have accounted
for a substantial portion of UTP's (including ULE) net sales. UTP's sales to any
single customer are also subject to significant variability from quarter to
quarter. Such fluctuations could have a material adverse effect on both UTP and
the Company's business, operating results or financial condition. The Company
expects that sales of UTP products to a limited number of customers will
continue to account for a high percentage of the net sales for the foreseeable
future. Moreover, there can be no assurance that UTP's current customers will
continue to place orders or that UTP will be able to obtain new orders from new
customers.
DECLINING MARKET FOR GAS LASERS; DEVELOPMENT AND OTHER RISKS RELATING TO SOLID
STATE LASER TECHNOLOGIES
Gas laser subsystems sales accounted for 33.1% and 47.7% of total Company's
sales for the fiscal years ended 1997 and 1996, respectively. The market for gas
lasers is mature and is expected to decline as customers transition from
conventional lasers, including gas, to solid state lasers, which are currently
expected to be the primary commercial laser technology in the future. In
response to this transition, the Company has devoted substantial resources to
developing solid state laser products. To date, sales of the Company's solid
state laser products have been limited and primarily for customer evaluation
purposes. The Company believes that a number of companies are further advanced
than the Company in their development efforts for solid state lasers and are
competing with evaluation units for many of the same design-in opportunities
than the Company is pursuing. It is anticipated that the average selling price
of solid state lasers may be significantly less in certain applications than the
gas laser products the Company is currently selling in these markets. The
Company further believes it will be necessary to continue to reduce the cost of
manufacturing and to broaden the wavelengths provided by its laser products.
There can be no assurance that the Company's solid state laser products will not
be rendered obsolete or uncompetitive by products of other companies.
VARIABILITY AND UNCERTAINTY OF QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company believes that
fluctuations in quarterly results may cause the market price of its Common Stock
to fluctuate, perhaps substantially. Factors which have had an influence on and
may continue to influence the Company's operating results in a particular
quarter include the timing of the receipt of orders from major customers,
product mix, competitive pricing pressures, the relative proportions of domestic
and international sales, costs associated with the acquisition or disposition of
businesses, products or technologies, the Company's ability to design,
manufacture, and ship products on a cost effective and timely basis, the delay
between incurrence of expenses to further develop marketing and service
capabilities and realization of benefits from such improved capabilities, the
announcement and introduction of cost effective new products by the Company and
by its competitors, and expenses associated with any intellectual property
litigation. In addition, the Company's sales will often reflect orders shipped
in the same quarter that they are received. Moreover, customers may cancel or
reschedule shipments, and production difficulties could delay shipments. The
timing of sales of the Company's Ultrapointe Systems may result in substantial
fluctuations in quarterly operating results due to the substantially higher per
unit price of these products relative to the Company's other products. In
addition, the Company sells its telecommunications equipment products to OEMs
who typically order in large quantities and therefore the timing of such sales
may significantly affect the Company's
17
19
quarterly results. The timing of such OEM sales can be affected by factors
beyond the Company's control, including demand for the OEM's products and
manufacturing issues experienced by OEMs. In this regard, the Company has
experienced a temporary rescheduling of orders by OEM telecommunications
customers. As a result of the above factors, the Company's results of operations
are subject to significant variability from quarter to quarter.
There can be no assurance that other acquisitions or dispositions of
businesses, products or technologies by the Company in the future will not
result in substantial charges or other expenses that may cause fluctuations in
the Company's quarterly operating results.
The Company's operating results in a particular quarter may also be
affected by the acquisition or disposition of other businesses, products or
technologies by the Company. For example, in the third quarter of fiscal 1997,
the Company incurred charges totaling $33.3 million for acquired in-process
research and development in connection with the acquisition of ULE. In the
fourth quarter of fiscal 1996, the Company incurred charges totaling $7.5
million for acquired in-process research and development related to the
acquisition of UFP and compensation expense in connection with the cancellation
of certain options of UTP and granted replacement options to purchase Uniphase
Common Stock to UTP employees. There can be no assurance that acquisitions or
dispositions of businesses, products or technologies by the Company in the
future will not result in substantial charges or other expenses that may cause
fluctuations in the Company's quarterly operating results.
INTENSE INDUSTRY COMPETITION
The laser, semiconductor capital equipment, CATV and telecommunications
industries in which the Company sells its products are highly competitive. In
each of the markets it serves, the Company faces intense competition from
established competitors, many of which have substantially greater financial,
engineering, research and development, manufacturing, marketing, service and
support resources. The Company is a recent entrant into the semiconductor
capital equipment, the CATV and telecommunications marketplaces and competes
with many companies in those markets that have substantially greater resources,
including greater name recognition, a larger installed base of products and
longer standing customer relationships. In order to remain competitive, the
Company must maintain a high level of investment in research and development,
marketing, and customer service and support. There can be no assurance that the
Company will be able to compete successfully in the laser, semiconductor capital
equipment, CATV or telecommunications industries in the future, that the Company
will have sufficient resources to continue to make such investments, that the
Company will be able to make the technological advances necessary to maintain
its competitive position or that its products will receive market acceptance.
The semiconductor capital equipment market is frequently affected by new product
introductions and new technologies that make existing production and inspection
equipment obsolete. There can be no assurance that others will not introduce
products which compete with the Ultrapointe System or which render the
Ultrapointe System obsolete or uncompetitive based on existing or new
technologies. In addition, there can be no assurance that technological changes
or development efforts by the Company's competitors will not render the
Company's products or technologies obsolete or uncompetitive.
DEPENDENCE ON KEY OEM RELATIONSHIPS
In July 1997, the Company entered into an exclusive OEM Agreement (the
"Agreement") with KLA-Tencor pursuant to which KLA-Tencor will distribute
Ultrapointe Systems through its worldwide distribution channels. This Agreement
supercedes any and all prior OEM negotiations, correspondence, understandings
and agreements regarding the Companies' business relationship. The Company
currently expects that KLA-Tencor will account for a majority of Ultrapointe's
net sales for the foreseeable future for Laser Imaging Systems used to analyze
defects on semiconductor wafers and photomasks during the manufacturing process
as well as automatic defect classification software products. The Agreement
outlines minimum quantities in the year of inception, product specifications,
ongoing research and development efforts on the product line, pricing and
payment terms. The Agreement is effective through June 30, 2000 and may be
extended for up to three (3) additional one year renewal periods thereafter.
18
20
On April 30, 1997, Tencor and KLA Instruments merged and formed KLA-Tencor
Corporation. The Company believes that the timing of the receipt of orders and
the related product mix under the Agreement will not be consistent with
historical orders for Ultrapointe Systems given the size and complexities
associated with merging these organizations, consequently, the Company's interim
revenue levels and profit margins may be adversely affected.
In addition, one laser subsystems customer, the Applied Biosystems Division
of Perkin-Elmer Corporation, accounted for approximately 10%, 12% and 12% of the
Company's net sales for fiscal years, 1997, 1996, and 1995, respectively. The
loss of orders from these or other OEM relationships could have a materially
adverse effect on the Company's business and operating results.
ATTRACT AND RETAIN KEY PERSONNEL
The future success of the Company is dependent, in part, on its ability to
attract and retain certain key personnel. In particular, the Company's research
and development efforts are dependent on the Company being able to hire and
retain engineering staff with the requisite qualifications. Competition in
recruiting highly skilled engineering personnel is extremely intense, and the
Company is currently experiencing substantial difficulty in identifying and
hiring certain qualified engineering personnel in many areas of its business. No
assurance can be given that the Company will be able to successfully hire such
personnel at compensation levels that are consistent with the Company's existing
compensation and salary structure. The Company's future success will also depend
to a large extent on the continued contributions of its executive officers and
other key management and technical personnel, none of whom has an employment
agreement with the Company and each of whom would be difficult to replace. The
Company does not maintains a key person life insurance policy on the Chief
Executive Officer. However, the loss of the services of one or more of the
Company's executive officers or key personnel or the inability to continue to
attract qualified personnel could delay product development cycles or otherwise
have a material adverse effect on the Company's business and operating results.
CONFLICTING PATENTS AND INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES; POTENTIAL
INFRINGEMENT CLAIMS
The laser, semiconductor capital equipment, CATV and telecommunications
industries in which the Company sells its products are characterized by frequent
litigation regarding patent and other intellectual property rights. Numerous
patents in these industries are held by others, including academic institutions
and competitors of the Company. Such patents could inhibit the Company's ability
to develop new products for such markets. The industry in which the Company
operates is characterized by periodic claims of patent infringement or other
intellectual property rights. While in the past licenses generally have been
available to the Company where third-party technology was necessary or useful
for the development or production of the Company's products, there can be no
assurance that licenses to third-party technology will be available on
commercially reasonable terms, if at all. Generally, a license, if granted,
would include payments by the Company of up-front fees, ongoing royalties or a
combination thereof. There can be no assurance that such royalty or other terms
would not have a significant adverse impact on the Company's operating results.
The Company is a licensee of a number of third party technologies and
intellectual property rights and is required to pay royalties to these third
party licensors on certain of its products, including its Ultrapointe Systems
and its solid state lasers. During fiscal 1997 and 1996, the Company expensed
$1.4 million and $1.3 million, respectively, in license and royalty fees
primarily in connection with its gas laser subsystems. In addition, there can be
no assurance that third parties will not assert claims against the Company with
the Company's existing products or with respect to future products under
development by the Company. In the event of litigation to determine the validity
of any third-party claims, such litigation could result in significant expense
to the Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology which is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available to the Company. In the
absence of such a license, the Company could be enjoined from future sales of
the infringing product or
19
21
products. In fiscal years 1992 and 1993, the Company incurred substantial legal
expenses in connection with a patent infringement action relating to the
Company's current gas laser subsystems brought by Spectra-Physics Lasers, Inc.
("Spectra-Physics"). While the Spectra-Physics case has since been settled, no
assurance can be given that, in the future, the Company will be able to avoid
similar actions by competitors or others or that the Company will not be forced
to initiate its own actions to protect its proprietary position.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY
The Company's future success depends in part upon its intellectual
property, including trade secrets, know-how and continuing technological
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products. The
Company currently holds 30 U.S. patents on products or processes and certain
corresponding foreign patents and has applications for certain patents currently
pending. While three patents have been issued with respect to the Company's
Ultrapointe Systems, no assurance can be given that competitors will not
successfully challenge the validity of these patents or design products that
avoid infringement of the Company's proprietary rights with respect to its
Ultrapointe Systems. There can be no assurance that other companies are not
investigating or developing other technologies that are similar to the
Company's, that any patents will issue from any application pending or filed by
the Company or that, if patents do issue, the claims allowed will be
sufficiently broad to deter or prohibit others from marketing similar products.
In addition, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented, or that the rights
thereunder will provide a competitive advantage to the Company. Further, the
laws of certain territories in which the Company's products are or may be
developed, manufactured or sold, including Asia, Europe or Latin America, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS
Various components included in the manufacture of the Company's products
are currently obtained from single or limited source suppliers. A disruption or
loss of supplies from these companies or an increase in price of these
components would have a material adverse effect on the Company's results of
operations, product quality and customer relationships. For example, the Company
obtains all the robotics, workstations and many optical components used in its
Ultrapointe Systems from Equipe Technologies, Silicon Graphics, Inc., and
Olympus Corporation, respectively. The Company currently utilizes a sole source
for the crystal semiconductor chip sets incorporated in the Company's solid
state microlaser products and acquires its pump diodes for use in its solid
state laser products from Philips, Opto Power Corporation and GEC. The Company
also obtains lithium niobate wafers, gallium arsenide wafers, specialized fiber
components and certain lasers used in its UTP and ULE products primarily from
Crystal Technology, Inc., Fujikura, Ltd., Philips Key Modules, and Sumitomo,
respectively. The Company does not have a long-term or volume purchase
agreements with any of these suppliers, and no assurance can be given that these
components will be available in the quantities required by the Company, if at
all. Further, UTP depends on relatively specialized components and it cannot be
assured that its respective suppliers will be able to continue to meet UTP's
requirements.
FUTURE CAPITAL REQUIREMENTS
The Company is devoting substantial resources for new facilities and
equipment for Uniphase Laser Enterprise and to the development of new products
for the solid state laser, semiconductor capital equipment, CATV and
telecommunications markets. Although the Company believes existing cash
balances, cash flow from operations and available lines of credit, will be
sufficient to meet its capital requirements at least through the end of fiscal
1998, the Company may be required to seek additional equity or debt financing to
compete effectively in these markets. The timing and amount of such capital
requirements cannot be precisely determined at this time and will depend on
several factors, including the Company's acquisitions and the demand for the
Company's products and products under development. There can be no assurance
that such additional financing will be available when needed, or, if available,
will be on terms satisfactory to the Company.
20
22
POTENTIAL VOLATILITY OF COMMON STOCK PRICE
The market price of the Company's Common Stock has recently been and is
likely to continue to be highly volatile and significantly affected by factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory action, developments with respect to patents or
proprietary rights, general market conditions and other factors. Further, the
Company's net revenues or operating results in future quarters may be below the
expectations of public market securities analysts and investors. In such event,
the price of the Company's Common Stock would likely decline, perhaps
substantially. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 30.0%, 24.5% and 28.9% of
the Company's net revenues in fiscal years 1997, 1996 and 1995, respectively,
and the Company expects that international sales will continue to account for a
significant portion of the Company's net revenues. The Company may continue to
expand its operations outside of the United States and to enter additional
international markets, both of which will require significant management
attention and financial resources. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other trade barriers, political and economic instability in foreign markets,
difficulties in staffing and management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations and potentially adverse tax consequences. Since
substantially all of the Company's foreign sales are denominated in U.S.
dollars, the Company's products may also become less price competitive in
countries in which local currencies decline in value relative to the U.S.
dollar. The Company's business and operating results may also be materially and
adversely affected by lower sales levels which typically occur during the summer
months in Europe and certain other overseas markets. Furthermore, the sales of
many of the Company's OEM customers are dependent on international sales and,
consequently, this further exposes the Company to the risks associated with such
international sales.
ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
The Board of Directors has the authority to issue up to 1,000,000 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
any further vote or action by the Company's shareholders. The Preferred Stock
could be issued with voting, liquidation, dividend and other rights superior to
those of the holders of Common Stock. The issuance of Preferred Stock under
certain circumstances could have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law prohibiting publicly-held Delaware corporations from
engaging in business combinations with certain stockholders for a specified
period of time without the approval of substantially all of its outstanding
voting stock. Such provisions could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial, in the short
term, to the interests of the stockholders. In addition, such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. The Company's Certificate of Incorporation
and Bylaws contain provisions relating to the limitations of liability and
indemnification of its directors and officers, dividing its Board of Directors
into three classes of directors serving three-year terms and providing that its
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 the Company.
LEGAL PROCEEDINGS
On May 19, 1997, Tacan Corporation ("Tacan") filed a lawsuit in the U.S.
District Court for the Southern District of California (the "Southern California
Action") against Uniphase Telecommunications
21
23
Products Inc. ("UTP") a subsidiary of the Company. The Complaint alleges claims
of breach of contract, breach of implied and express warranties, negligent
misrepresentation, conversion and negligent interference with perspective
economic advantage. The claims arise out of sales to Tacan of products made by
UTP that Tacan claims were defective and did not meet contract specifications,
and as a result caused Tacan to suffer damages in the form of lost earnings and
damage to its reputation and goodwill. The damages claimed are unspecified, but
Tacan alleges that they are expected to exceed $1.6 million. Tacan also seeks
punitive damages for UTP's alleged conversion of equipment ordered and built for
Tacan but which UTP allegedly has refused to ship to Tacan. UTP has filed a
motion, scheduled for hearing on November 3, 1997, to dismiss, or in the
alternative, stay the Southern California action on the ground that there is a
prior action pending between the parties regarding the same dispute. That prior
action was filed by UTP on November 6, 1996 in the U.S. District Court for the
District of Connecticut (the "Connecticut Action"). In the Connecticut Action,
UTP alleges claims against Tacan for breach of contract, breach of the covenant
of good faith and fair dealing, statutory theft, unjust enrichment and unfair
competition. UTP seeks to recover in excess of $695,000 for amounts that Tacan
refused to pay for equipment ordered and/or received by Tacan from UTP. UTP also
seeks punitive damages and treble damages pursuant to Connecticut law. Tacan
made a motion to dismiss the Connecticut Action for lack of personal
jurisdiction over Tacan and for improper venue. On August 11, 1997, Tacan's
motion to dismiss was denied and the Connecticut Action will therefore proceed.
On September 19, 1997, Tacan responded to UTP's complaint in the Connecticut
Action by denying liability, raising affirmative defenses, and asserting
counterclaims against UTP. Tacan's counterclaims in the Connecticut Action
largely duplicate the claims alleged by Tacan in the Southern California Action.
In addition, however, Tacan has alleged a claim for unfair trade practices under
Connecticut law. In its counterclaims, Tacan seeks damages in amounts to be
proven at trial but allegedly exceeding $11.6 million. Tacan also seeks punitive
damages under the Connecticut Unfair Trade Practice Act.
No discovery has been taken in the Southern California action and no trial
date has been set. Preliminary written discovery has been taken by UTP in the
Connecticut action but no trial has been set. The Company believes the foregoing
litigation with Tacan will not have a material negative impact on the Company's
financial condition or results of operations. However, given the inherent
uncertainty of litigation and the early stage of discovery, there can be no
assurance that the ultimate outcome in the litigation will be in the Company's
favor, or that the diversion of management's attention, and any costs associated
with the lawsuit, will not have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 2. PROPERTIES
The Company owns two properties in San Jose, California, totaling 109,000
square feet, which included land, buildings and improvements. The Company's
principal sales, marketing, technical support, administration, and research and
development operations as well as manufacturing operations for the argon and
solid state lasers and Ultrapointe products occupy these facilities. The Company
is currently leasing unused space to a tenant.
The Company's manufacturing facilities for its He-Ne laser products occupy
a 20,000 square foot building in Manteca, California. The building is leased
through September 1998. The Company's facilities for its telecommunications
equipment products occupy two leased buildings of 33,000 and 20,000 square feet
in Bloomfield, Connecticut, where its modulator products are manufactured and a
18,000 square foot leased building in Chalfont, Pennsylvania where its
transmitter products are manufactured. UFP products are manufactured at the
Company's 7,000 square foot facility in Witney, United Kingdom and its
engineering efforts are performed at a 5,000 square foot facility in Batavia,
Illinois. Leases for the Bloomfield, Chalfont, Witney and Batavia facilities
expire in July 2002 (with a lease extension available through 2007), February
2001, December 2013, and July 1999, respectively. As a part of the acquisition
of ULE, the Company leased certain clean rooms, laboratories, and office space
totaling 12,000 square feet at the IBM Research Facility in Zurich, Switzerland,
from IBM. ULE utilizes these facilities to manufacture 980 nm lasers. As this
lease with IBM expires in 1999, the Company has leased a 60,000 square foot
building expiring in 2007 in Binz, Switzerland for the purposes of relocating
the ULE operations. The Company also maintains sales and service offices in both
the United Kingdom and Germany to support its European operations.
22
24
ITEM 3. LEGAL PROCEEDINGS
On May 19, 1997, Tacan Corporation ("Tacan") filed a lawsuit in the U.S.
District Court for the Southern District of California (the "Southern California
Action") against Uniphase Telecommunications Products Inc. ("UTP") a subsidiary
of the Company. The Complaint alleges claims of breach of contract, breach of
implied and express warranties, negligent misrepresentation, conversion and
negligent interference with perspective economic advantage. The Company believes
the Southern California Action will not have a material negative impact on the
Company's financial condition or results of operations. However, given the
inherent uncertainty of litigation and the early stage of discovery, there can
be no assurance that the ultimate outcome in the Southern California Action will
be in the Company's favor, or that the diversion of management's attention, and
any costs associated with the lawsuit, will not have a material adverse effect
on the Company's financial condition or results of operations.
Several former employees have commenced wrongful termination actions
against the Company. The Company believes these claims are without merit and is
vigorously defending them. Even if these claims are adjudicated in favor of the
plaintiffs, the Company does not believe that the ultimate resolution of these
matters will have material adverse impact on the Company or its operations.
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is included on the inside back cover
and on page 42 of the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 2 of Notes to Consolidated Financial Statements
contained in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included in the Financial
Highlights for the five years ended June 30, 1997, which appears on page 1 of
the Company's 1997 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is included in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which appears on pages 15 to 21 of the Company's 1997 Annual Report
to Stockholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included on pages 22 to 41 of the
Company's 1997 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
25
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Proposal One:
Elections of Directors, Directors and Executive Officers, and Section 16(a)
Beneficial Ownership Reporting Compliance sections of the Company's Proxy
Statement to be filed in connection with the Company's 1997 Annual Meeting of
Stockholders and is incorporated hereby by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Executive
Compensation and Related Information sections of the Company's Proxy Statement
to be filed in connection with the Company's 1997 Annual Meeting of Stockholders
and is incorporated hereby by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Security Ownership
of Certain Beneficial Owners and Management section of the Company's Proxy
Statement to be filed in connection with the Company's 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Compensation
Committee Interlocks and Insider Participation and Certain Transactions sections
of the Company's Proxy Statement to be filed in connection with the Company's
1997 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed or incorporated by
reference as part of this annual report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed or incorporated by
reference as part of this annual report.
(a)(3) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this annual report.
(b) REPORTS ON FORM 8-K
The Company filed reports on form 8-K/A Amendment 1 and Amendment 2 on May
23, 1997 and June 10, 1997, respectively, reporting the purchase of ULE and
including the audited financial statements of Laser Enterprise, a division of
International Business Machines in accordance with Rule 3.05 of Regulation S-X
and the pro forma financial information required by Article 11 of Regulation
S-X.
24
26
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REFERENCE PAGE
------------------------------------
1997 ANNUAL
FORM 10-K REPORT TO STOCKHOLDERS
--------- ----------------------
Consolidated Statements of Operations -- Years ended June 30,
1997, 1996 and 1995......................................... -- 22
Consolidated Balance Sheets -- June 30, 1997 and 1996......... -- 23
Consolidated Statements of Stockholders' Equity -- Years ended
June 30, 1997, 1996 and 1995................................ -- 24
Consolidated Statements of Cash Flows -- Years ended June 30,
1997, 1996 and 1995......................................... -- 25
Notes to Consolidated Financial Statements.................... -- 25
Report of Ernst & Young LLP, Independent Auditors............. -- 26-40
Schedule II -- Valuation and Qualifying Accounts -- June 30,
1997, 1996 and 1995......................................... 26 --
All other financial statement schedules have been omitted because they are
not applicable or are not required or the information required to be set forth
therein is included in the Company's consolidated financial statements set forth
in Item 8 of this Form 10-K and the notes thereto.
25
27
UNIPHASE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER DEDUCTION END OF
DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS(2) (1) PERIOD
- -------------------------------------------- ---------- ---------- ----------- --------- ----------
(IN THOUSANDS)
Year ended June 30, 1997
Allowance for doubtful accounts........... $285 $582 $ 1,083 $73 $1,877
Year ended June 30, 1996
Allowance for doubtful accounts........... $164 $139 $ -- $18 $ 285
Year ended June 30, 1995
Allowance for doubtful accounts........... $100 $ 59 $ -- $ 5 $ 164
- ---------------
(1) Charges for uncollectible accounts, net of recoveries.
(2) Allowance assumed through the acquisition of ULE.
26
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 24, 1997 UNIPHASE CORPORATION
By: /s/ KEVIN N. KALKHOVEN
------------------------------------
Kevin N. Kalkhoven
Chairman and Chief Executive
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kevin N. Kalkhoven and Danny E. Pettit,
and each of them, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
/s/ KEVIN N. KALKHOVEN Chairman and Chief September 24, 1997
- ----------------------------------------------- Executive Officer
Kevin N. Kalkhoven (Principal Executive
Officer)
/s/ DANNY E. PETTIT Vice President, Finance, September 24, 1997
- ----------------------------------------------- Chief Financial Officer
Danny E. Pettit and Secretary (Principal
Financial and Accounting
Officer)
/s/ WILLIAM B. BRIDGES Director September 24, 1997
- -----------------------------------------------
William B. Bridges
/s/ ROBERT C. FINK Director September 24, 1997
- -----------------------------------------------
Robert C. Fink
/s/ CATHERINE P. LEGO Director September 24, 1997
- -----------------------------------------------
Catherine P. Lego
Director
- -----------------------------------------------
Stephen C. Johnson
/s/ ANTHONY R. MULLER Director September 24, 1997
- -----------------------------------------------
Anthony R. Muller
Director
- -----------------------------------------------
Wilson Sibbett, Ph.D.
Director
- -----------------------------------------------
Casimir S. Skrzypczak
27
29
UNIPHASE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------------- ----------------------------------------------------------------------------
3(i)(b)(2) Amended and Restated Certificate of Incorporation.
3(ii)(c)(7) Bylaws of the Registrant, as amended.
10.1(2) Superseding Patent License Agreement, dated June 21, 1989, between Patlex
10.2(2) Corporation and the Registrant. Agreement, dated December 2, 1991, between
Crosfield Electronics Limited and the Registrant.
10.3(2) License Agreement, dated December 18, 1991, between The Regents of
University of California and the Registrant.
10.4(2) License Agreement, dated August 2, 1993, between Research Corporation
Technologies, Inc., and the Registrant.
10.5(3) 1984 Amended and Restated Stock Plan.
10.6(3) 1993 Flexible Stock Incentive Plan.
10.7(3) 1993 Amended and Restated Employee Stock Purchase Plan.
10.8(2) Patent License Agreement, dated October 29, 1993, by and between the
Registrant and Molecular Dynamics, Inc.
10.9(4) License Agreement, May 9, 1994, between I.E. Optomech Ltd. and the
Registrant.
10.10(5) Loan and Security Agreement, dated January 28, 1997 between Bank of the West
and the Registrant.
10.11(6) Distributor Agreement, dated October 1, 1994, between Innotech Corporation
and the Registrant.
10.12(6) Joint Venture Agreement, dated July 24, 1995, between Daniel Guillot and the
Registrant.
10.13(6) Amendment, dated July 14, 1995, to Lease, dated November 6, 1984, between
Alexander/Dorothy Scheflo and the Registrant.
10.14(6) Laser Technology Sublicense Agreement, dated October 13, 1994, between The
University Court of The University of St. Andrews through I.E. Optomech and
theRegistrant.
10.15(6) Nonexclusive Sublicense Agreement, dated July 14, 1995, between Coherent,
Inc. and the Registrant.
10.16(6) Sublicense Agreement, dated May 26, 1995, between Stanford University and
the Registrant.
10.17(6) License Agreement, dated June 8, 1995, between ISOA, Inc. and the
Registrant.
10.18(6) Research and Development Contract, dated January 18, 1995, between the
National Institute of Standards and Technology to the Registrant.
10.19(8) Purchase and Sale Agreement between Registrant and Tasman-Sterling
Associates, a California general partnership, dated January 30, 1996.
10.20(9) Form of Stock Purchase Agreement between Registrant, Fiberoptic Alignment
Solutions, Inc., an Illinois corporation ("FAS"), Uniphase
Telecommunications Products, Inc., a Delaware corporation, and the
shareholders of FAS named therein, and Amendment No. 1 thereto datedas of
May 31, 1996.
28
30
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------------- ----------------------------------------------------------------------------
10.21(10) Form of Agreement between Registrant and GCA Fibreoptics Limited for the
Sale and Purchase of the entire issued shares capital of GCA Fibreoptics
Limited as of May 24, 1996.
10.22(7) Joint Venture agreement, dated July 24, 1995, between Daniel Guillot and the
Registrant, as amended October 6, 1995.
10.23(7) OEM Agreement, dated November 20, 1995, between the Registrant and Tencor
Instruments.
10.24(7) License Agreement, dated November 20, 1995, between the Registrant and
Tencor Instruments.
10.25(11) Amended and Restated 1993 Flexible Stock Incentive Plan.
10.26(12) OEM Agreement dated July 24, 1997 by and between KLA-Tencor Corporation and
the Registrant.
10.28(1) Purchase Agreement among Uniphase Corporation, International Business
Machines Corporation, and Uniphase Laser Enterprise AG
10.29(1) Technology License Agreement
10.30(1) Patent License Agreement
10.31(1) The Agreement for Exchange of Confidential Information
13 Portions of the 1997 Annual Report to Stockholders expressly incorporated by
reference herein.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
24.1 Powers of Attorney. (See Page 26)
27 Financial Data Schedule
- ---------------
(1) Incorporated by reference to the exhibit to the Company's current Report on
Form 8-K filed March 25, 1997.
(2) Incorporated by reference to the exhibits filed with the Registrant's
registration statement on Form S-1, file number 33-68790, which was
declared effective November 17, 1993.
(3) Incorporated by reference to the exhibits filed with the Registrant's
registration statement on Form S-8, file number 33-74716 filed with the
Securities and Exchange Commission on February 1, 1994.
(4) Incorporated by reference to the exhibits filed with the Registrant's
annual report on Form 10-K for the period ended June 30, 1994.
(5) Incorporated by reference to the exhibits filed with the Registrant's
quarterly report on Form 10-Q for the period ended December 31, 1996 as
filed on February 14, 1997.
(6) Incorporated by reference to the exhibit filed with the Registrant's annual
report on form 10-K for the period ended June 30, 1995.
(7) Incorporated by reference to exhibits filed with the Registrant's quarterly
report on Form 10-Q for the period ended December 31, 1995.
(8) Incorporated by reference to the exhibit to the Company's current Report on
Form 8-K filed February 22, 1996.
(9) Incorporated by reference to the exhibit to the Company's form S-3/A filed
June 7, 1996.
(10) Incorporated by reference to the exhibit to the Company's Post-Effective
Amendment No. 1 to Registration Statement on Form S-3 filed June 20, 1996.
29
31
(11) Incorporated by reference to exhibits filed with the Registrant's
registration statement on form S-8, file number 33-31722 filed with the
Securities and Exchange Commission on February 27, 1996.
(12) Incorporated by reference to exhibits filed with Registrant's registration
statement on form S-3A, Amendment No. 2, file number 333-27931 filed with
the Securities and Exchange Commission on August 12, 1997.
30