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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
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 94-2579683
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
163 Baypointe Parkway
San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
(408) 434-1800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 7, 1998.
Common Stock $.001 par value 34,913,445
Class Number of Shares
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data) Three months ended Nine months ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 45,488 $ 26,928 $126,895 $ 73,073
Cost of sales 22,210 14,703 64,311 39,167
-------- -------- -------- --------
Gross profit 23,278 12,225 62,584 33,906
Operating expenses:
Research and development 3,921 2,552 9,999 6,307
Royalty and license 656 389 1,631 1,209
Selling, general and administrative 6,397 8,965 19,343 17,635
Acquired in-process research & development -- 33,314 6,568 33,314
-------- -------- -------- --------
Total operating expenses 10,974 45,220 37,541 58,465
-------- -------- -------- --------
Income (loss) from operations 12,304 (32,995) 25,043 (24,559)
Interest and other income, net 750 877 2,270 2,805
-------- -------- -------- --------
Income (loss) before income taxes 13,054 (32,118) 27,313 (21,754)
Income tax expense 4,636 2,429 12,028 6,056
-------- -------- -------- --------
Net income (loss) $ 8,418 $(34,547) $ 15,285 $(27,810)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.24 $ (1.04) $ 0.44 $ (.84)
======== ======== ======== ========
Dilutive earnings (loss) per share $ 0.23 $ (1.04) $ 0.41 $ (.84)
======== ======== ======== ========
See accompanying notes
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UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, June 30,
1998 1997
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 45,501 $ 29,186
Short-term investments 46,958 52,009
Accounts receivable, less allowances for returns and doubtful accounts
of $418 at March 31, 1998 and $1,877 at June 30, 1997 30,502 20,317
Inventories 19,256 18,668
Refundable income taxes 4,852 6,010
Deferred income taxes and other current assets 7,979 7,525
--------- ---------
Total current assets 155,048 133,715
Property, plant and equipment, net 45,407 31,251
Intangible assets 9,946 10,969
Long-term deferred income taxes and other assets 1,957 1,644
--------- ---------
Total assets $ 212,358 $ 177,579
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ -- $ 6,061
Accounts payable 11,151 4,781
Accrued payroll and related expenses 5,829 4,528
Income taxes payable 7,156 5,049
Other accrued expenses 5,347 4,908
--------- ---------
Total current liabilities 29,483 25,327
Accrued pension and other employee benefits 3,161 2,392
Other non-current liabilities -- 83
Commitments and contingencies Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000
None issued and outstanding --
Common stock, $0.001 par value:
Authorized shares--50,000,000
Issued and outstanding shares - 34,902,462 at March 31, 1998
and 33,843,934 at June 30, 1997 35 34
Additional paid-in capital 172,076 156,864
Retained earnings (deficit) 8,181 (7,104)
Net unrealized gain on securities available-for-sale 54 11
Foreign currency translation adjustment (632) (28)
--------- ---------
Total stockholders' equity 179,714 149,777
--------- ---------
Total liabilities and stockholders' equity $ 212,358 $ 177,579
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See accompanying notes
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UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
-----------------------
1998 1997
-------- --------
Operating activities
Net income (loss) $ 15,285 $(27,810)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 6,038 3,034
Stock compensation expense 787 561
Acquired in-process research and development 6,568 33,314
Write-off of property, plant and equipment -- 1,500
Write-off of intangible assets and other assets -- 500
Change in operating assets and liabilities:
Accounts receivable (9,968) (2,702)
Inventories (528) (6,595)
Deferred income taxes and other current assets 678 4,159
Accounts payable, accrued liabilities and other current liabilities 19,054 2,858
-------- --------
Net cash provided by operating activities 37,914 8,819
-------- --------
Investing activities
Purchase of short-term investments (52,204) (18,291)
Proceeds from sale of short-term investments 57,298 32,605
Purchase of property, plant and equipment (18,149) (8,894)
Acquisition of UFC, net of cash acquired (6,696) --
Purchase of net assets of Laser Enterprises -- (45,000)
Purchase of intellectual property (550) --
Increase in other assets (287) --
-------- --------
Net cash used in investing activities (20,588) (39,580)
-------- --------
Financing activities
Repayment of notes payable (6,061) (548)
Proceeds from issuance of common stock under stock option and
stock purchase plans 5,050 3,114
-------- --------
Net cash provided by (used in) financing activities (1,011) 2,566
-------- --------
Increase (decrease) in cash and cash equivalents 16,315 (28,195)
Cash and cash equivalents at beginning of period 29,186 52,463
-------- --------
Cash and cash equivalents at end of period 45,501 $ 24,268
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SUPPLEMENTAL CASH FLOW INFORMATION
Tax benefits from stock option and stock purchase plans $ 9,376 $ 6,884
======== ========
See accompanying notes
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UNIPHASE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
The financial information at March 31, 1998 and for the three and nine
month periods ended March 31, 1998 and 1997 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial information set
forth herein, in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, such information does not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included or incorporated
by reference in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
The results for the three and nine month periods ended March 31, 1998
may not be indicative of results for the fiscal year ending June 30, 1998 or any
future period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," was issued and is effective for fiscal
years commencing after December 15, 1997.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures About Segments of an Enterprise and Related Information,"
was issued and is effective for fiscal years commencing after December 15, 1997.
The Company is required to adopt the provisions of these accounting
standards in fiscal year 1999 and expects the adoption will not impact results
of operations or financial position but will require additional disclosures.
INCOME TAXES
The effective tax rates used for the third quarter and the first nine
months of fiscal 1998 were 35.5% and 44.0%, respectively. The nine-month 1998
tax rate is higher than the statutory rate due to the non-deductibility of
acquired in-process research and development expenses. The effective tax rates
used for the third quarter and the nine month period ended March 31, 1997 were
(8%) and (28%) due primarily to the non-deductibility of acquired in-process
research and development expenses.
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INVENTORIES
Inventories consist of the following:
March 31, June 30,
(in thousands) 1998 1997
------- -------
Raw materials and purchased parts $ 7,392 $ 5,876
Work in process 6,443 10,468
Finished goods 5,421 2,324
------- -------
$19,256 $18,668
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EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, Earnings per Share. Statement 128 replaced
the previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. The Company's diluted earnings per share is very similar
to the previously reported primary earnings per share. All earnings per share
amounts for all prior periods presented, where necessary, have been restated to
conform to the Statement 128 requirements and to reflect the 100% stock dividend
discussed in the "Stock Dividend" note to these unaudited consolidated financial
statements. As the Company incurred a loss in the third quarter of fiscal 1997,
the effect of dilutive securities for the three and nine-month periods ended
March 31, 1997 totaling 2,477,000 and 2,726,000, respectively have been excluded
from the 1997 computation as they are antidilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Three Months Ended Nine Months Ended
(in thousands, except per share data) March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Denominator for basic earnings (loss)
per share-weighted average shares 34,762 33,224 34,412 32,978
Effect of dilutive securities:
Stock options outstanding 2,467 -- 2,540 --
-------- -------- -------- --------
Denominator for diluted earnings (loss) per share 37,229 33,224 36,952 32,978
======== ======== ======== ========
Net income (loss) $ 8,418 $(34,547) $ 15,285 $(27,810)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.24 $ (1.04) $ 0.44 $ (0.84)
======== ======== ======== ========
Dilutive earnings (loss) per share $ 0.23 $ (1.04) $ 0.41 $ (0.84)
======== ======== ======== ========
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LITIGATION AND CONTINGENCIES
Certain former employees have commenced claims against the Company
alleging wrongful termination, fraud and termination in violation of public
policy. The Company believes these claims are without merit and is vigorously
defending them. Even if the remaining claims were adjudicated in favor of the
plaintiffs, the Company does not believe that the ultimate resolution of these
matters will have a material adverse impact on the Company or its operations.
STOCK DIVIDEND
In November 1997, the stockholders of the Company approved an increase
in the number of shares of common stock authorized from 20,000,000 to 50,000,000
shares and the Company declared a 100% stock dividend. The stock dividend was
paid November 12, 1997. All share and per share amounts included in the
accompanying unaudited consolidated financial statements and notes applicable to
prior periods have been restated to reflect this stock dividend.
ACQUISITION OF UFC PTY LTD.
On November 26, 1997, the Company acquired 100% of the capital stock of
Uniphase Fiber Components Pty Ltd. (UFC-formerly INDX Pty Ltd.) and obtained
certain licensing rights from Australia Photonics Pty Limited (AP). UFC designs
and manufactures fiber optic reflection filters (fiber Bragg gratings) for
wavelength division multiplexing (WDM) applications. The total purchase price of
$6,896,000 included a cash payment of $6,496,000 to AP and acquisition expenses
of $400,000.
The acquisition has been accounted for as a purchase and accordingly,
the accompanying interim fiscal 1998 financial statements include the results of
operations of UFC subsequent to the acquisition date. The purchase price was
allocated to the net assets including the in-process research and development
acquired. The purchased intangible assets are being amortized over the estimated
useful life of 5 years. Pro forma results of operations as if the transaction
had occurred at the beginning of the year are not shown as the effect would not
be material.
To determine the value of the acquired in-process research and
development, the Company considered, among other factors, the state of
development of each project, the time and resources needed to complete each
project, expected income, target markets and associated risks. Associated risks
included inherent difficulties and uncertainties in completing the projects and
thereby achieving technical feasibility, and risks related to the viability of
and potential changes in future target markets. The Company applied a discount
rate of 20% in the valuation of in-process technology. This analysis resulted in
a valuation of $6,568,000 for acquired in-process research and development that
had not reached technological feasibility and did not have alternative future
uses. Therefore, in accordance with generally accepted accounting principles,
such $6,568,000 was charged to income.
The effects of the INDX acquisition on the 1998 interim consolidated
statement of cash flows were as follows (in thousands):
Working capital (deficiency) acquired $ (344)
Property and equipment 279
Intangibles 193
In-process research and development 6,568
-------
Total purchase price, net of cash acquired $ 6,696
=======
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SIGNIFICANT CUSTOMERS
One telecommunications customer accounted for approximately 12% of the
Company's net sales for the first nine months of fiscal 1998. One laser
subsystem customer accounted for approximately 12% of the Company's net sales
for each of the first nine months of fiscal year 1997 and 1996.
SUBSEQUENT EVENT
On April 21, 1998, the Company announced the signing of a letter of
intent to acquire Philips Optoelectronics B.V., a unit of Philips N.V. This
group develops, manufactures and markets high performance semiconductor lasers
and components for telecommunications, CATV, multimedia and printing markets.
The acquisition of Philips Optoelectronics would be accounted for as a purchase
and is subject to a number of contingencies including satisfactory completion of
due diligence, the negotiation of definitive agreements and certain closing
conditions, including regulatory approvals. As a result, there can be no
assurance that such acquisition will be consummated. The letter of intent calls
for the Company to issue common stock to Philips N.V. whereby Philips would own
approximately 10% of the Company's outstanding common stock. The letter of
intent also includes a provision for contingent consideration that will be
computed based on an agreed upon formula for cumulative shipments of certain
products manufactured by Philips Optoelectronics over a four-year period. This
contingent consideration is expected to be fulfilled through the issuance of
incremental equity in the Company and will only be issued if the cumulative
product shipments achieve a minimum percentage of targeted volumes that have yet
to be agreed upon. The contingent consideration will not be included in the
original acquisition cost, and will only be recorded if the cumulative product
shipment criteria has been met. The Company anticipates that a significant
portion of the purchase price would result in an acquired in-process research
and development charge during the quarter ending June 30, 1998, thereby
resulting in a net loss for both the quarter and fiscal year ending June 30,
1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNIPHASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Recent Events
On April 21, 1998, the Company announced the signing of a letter of
intent to acquire Philips Optoelectronics B.V., a unit of Philips N.V. This
group develops, manufactures and markets high performance semiconductor lasers
and components for telecommunications, CATV, multimedia and printing markets.
The acquisition of Philips Optoelectronics would be accounted for as a purchase
and is subject to a number of contingencies including satisfactory completion of
due diligence, the negotiation of definitive agreements and certain closing
conditions, including regulatory approvals. As a result, there can be no
assurance that such acquisition will be consummated. The letter of intent calls
for the Company to issue common stock to Philips N.V. whereby Philips would own
approximately 10% of the Company. The letter of intent also includes a provision
for contingent consideration that will be computed based on an agreed upon
formula for cumulative shipments of certain products manufactured by Philips
Optoelectronics over a four-year period. This contingent consideration is
expected to be fulfilled through the issuance of incremental equity in the
Company and will only be issued if the cumulative product
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shipments achieve a minimum percentage of targeted volumes that have yet to be
agreed upon. The contingent consideration will not be included in the original
acquisition cost, but will only be recorded if the cumulative product shipment
criteria has been met. The Company anticipates that a significant portion of the
purchase price would result in an acquired in-process research and development
charge during the quarter ending June 30, 1998, thereby resulting in a net loss
for both the quarter and fiscal year ending June 30, 1998.
On November 26, 1997, the Company acquired 100% of the capital stock of
UFC Pty Ltd. (UFC) and obtained certain licensing rights from Australian
Photonics Pty Limited (AP). As a result of the acquisition, the Company recorded
an in-process research and development charge of $6,568,000 during the second
quarter of fiscal 1998. This amount was charged to operations and represents the
estimated value of development programs that had not reached technological
feasibility.
Net Sales
In the third quarter of fiscal 1998, ended March 31, 1998, net sales
were $45.5 million, which represented a $18.6 million or 69% increase over net
sales of $26.9 million reported for the third quarter of fiscal 1997. For the
first nine months of fiscal 1998, net sales were $126.9 million, which
represented a $53.8 million or 74% increase over net sales of $73.1 million in
the same period of fiscal 1997. The increases in net sales for the quarter and
nine-month periods were primarily due to increased sales of $16.8 million and
$50.0 million, respectively, of the Company's laser and telecommunications
products. The results for the first nine months of fiscal 1998 include sales of
Uniphase Laser Enterprise which accounted for 20% of telecommunication product
sales and was acquired in March 1997 in a transaction accounted for as a
purchase. Net sales also increased $2.6 million or 6% over the second quarter of
fiscal 1998 amount of $42.9 million, primarily due to sales growth in certain
telecommunications and laser subsystem products. The Company's Ultrapointe
division experienced an increase in sales during the first nine months of fiscal
1998 of approximately $3.9 million over the prior year primarily due to recovery
from a cyclical downturn experienced in the semiconductor industry during fiscal
1997. Sales of Ultrapointe systems are expected to be lower in the fourth
quarter of fiscal 1998 as compared to the first three quarters of fiscal 1998
resulting from ongoing unsettled semiconductor equipment markets.
Gross Profit
In the third quarter of fiscal 1998, the Company's gross profit
increased 90% to $23.3 million or 51% of net sales from $12.2 million or 45% of
net sales in the same period of fiscal 1997. For the first nine months of fiscal
1998, gross profits increased 85% to $62.6 million or 49% of net sales from
$33.9 million or 46% of net sales in the same period of fiscal 1997. Gross
profit increased $2.5 million or 12% over the second quarter of fiscal 1998.
Gross profit in the third quarter of fiscal 1998 improved over prior periods due
in part to an improvement in manufacturing yields of its gallium arsenide based
lasers combined with the lower cost structure of internally manufactured CATV
amplifiers the Company historically purchased from third parties. The increase
in gross profit over fiscal 1997 for the quarter and the nine month period is
also due to increased sales of certain other high margin telecommunications
products and a reduction in certain volume discount accruals. These increases
were partially offset by the recognition of certain non-recurring inventory
charges totaling $1 million in the third quarter of fiscal 1997.
Gross margin for the third quarter of fiscal 1998 includes the ongoing
cost of qualifying a new manufacturing facility in Zurich and costs related to
the retooling of modulator production facilities for certain customers' next
generation products. The Company anticipates the new Zurich manufacturing
facility will be fully operational by the end of calendar 1998. Reduced sales of
Ultrapointe systems may
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also have an adverse effect on gross profit for the remainder of fiscal 1998.
The Company expects that there will continue to be periodic fluctuations in its
gross margin resulting from these factors and changes in its product mix,
competitive pressures, manufacturing yields, inefficiencies associated with new
product introductions and other factors.
Research and Development
In the third quarter of fiscal 1998, research and development (R&D)
expense was $3.9 million or 9% of net sales which represented a $1.4 million or
54% increase over R&D expense of $2.6 million or 9% of net sales in the third
quarter of fiscal 1997. For the first nine months of fiscal 1998, research and
development expense was $10.0 million or 8% of net sales which represents a $3.7
million or 59% increase over the same period in fiscal 1997. The increase in
research and development expense is primarily due to increased expenditures
associated with the continued development and enhancement of the Company's
telecommunications and fiber optic product lines. R&D expense increased $728,000
or 23% over the second quarter of fiscal 1998 resulting from increases in
development costs for telecommunications products. The Company anticipates that
R&D expense will continue to increase in absolute amounts and may fluctuate as a
percentage of net sales.
Royalty and License
In the third quarter of fiscal 1998, royalty and license expenses was
$656,000 or 1% of net sales which represented a $267,000 or 69% increase over
royalty and license expense of $389,000 or 1% of net sales in the third quarter
of fiscal 1997. For the first nine months of fiscal 1998, royalty and license
expense of $1.6 million was comparable to the corresponding fiscal 1997 amount
of $1.2 million, however, such expenses decreased as a percentage of net sales
to 1% from 2%. The decrease as a percentage of net sales was due to an
increasing proportion of revenue being derived from certain royalty-free
telecommunication products.
The Company continues to develop products in solid state laser,
telecommunications, fiber optic and semiconductor equipment technology
industries. There are numerous patents for these products, some of which are
held by others, including academic institutions and competitors of the Company.
Such patents could inhibit the Company's ability to develop, manufacture and
sell products. A number of the patents in these industries are conflicting. If
there is conflict between a third-party's patents or products and those of the
Company, it could be very costly for the Company to enforce its rights in an
infringement action or defend such an action brought by another party. In
addition, the Company may need to obtain license rights to certain patents and
may be required to make substantial payments, including continuing royalties, in
exchange for such license rights. There can be no assurance that licenses to
third party technology, if needed, will be available on commercially reasonable
terms.
Selling, General and Administrative
In the third quarter of fiscal 1998, selling, general and administrative
(SG&A) expense was $6.4 million or 14% of net sales, which represented a $2.6
million or 29% decrease from SG&A expense of $9.0 million or 33% of net sales in
the third quarter of fiscal 1997. SG&A expense in the third quarter of fiscal
1997 included certain charges and incremental allowances for doubtful accounts
totaling approximately $4.5 million primarily for its telecommunications
operations. For the nine months of fiscal 1998, SG&A expense was $19.3 million
or 15% of net sales which represented a $1.7 million or 10% increase over SG&A
expense of $17.6 million or 24% of net sales in the same period of fiscal 1997.
SG&A expense decreased $256,000 or 4% over the second quarter of fiscal 1998
amount of $6.7 million, primarily because of lower business development costs.
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Acquired In-process Research and Development
The Company's operating results in any particular quarter may be
affected by the acquisition or disposition of other businesses, products or
technologies by the Company. For example, in the second quarter of fiscal 1998,
the Company incurred charges totaling $6.6 million for acquired in-process
research and development in connection with the acquisition of UFC. 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 Uniphase Laser Enterprise ("ULE"). 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.
Interest and Other Income, Net
In the third quarter of fiscal 1998, interest and other income, net was
$750,000, which represented a $127,000 decrease from $877,000 in the third
quarter of fiscal 1997. For the first nine months of fiscal 1998, interest and
other income, net decreased to $2.3 million from $2.8 million in the same period
of fiscal 1997. The decrease in interest and other income is primarily due to a
reduced level of short-term investments resulting from the cash payment to IBM
of $45 million for ULE in March 1997, and the payment to AP of approximately
$6.5 million for UFC and certain licensing rights in November, 1997.
Income Taxes
The effective tax rate used for the third quarter and the first nine
months of fiscal 1998 were 35.5% and 44.0%, respectively. The nine-month 1998
tax rate is higher than the statutory rate due to the non-deductibility of
acquired in-process research and development expenses. The effective tax rates
used for the third quarter and the nine month period ended March 31, 1997 were
(8%) and (28%) due primarily to the non-deductibility of acquired in-process
research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company's combined balance of cash, cash
equivalents and short-term investments was $92.5 million. The Company has met
its liquidity needs during fiscal 1998 primarily through cash generated from
operating activities totaling $37.9 million. Cash provided by operating
activities is primarily the result of net income before depreciation and
amortization, stock compensation expense and acquired in-process research and
development costs. Cash provided by operating activities also includes
approximately $9.2 million generated from reductions in net working capital.
Cash used in investing activities was $20.6 million for the first nine
months of fiscal 1998. The Company's acquisition of UFC accounted for $6.7
million of investing activity. The Company incurred capital expenditures of
$18.1 million primarily in facilities improvements and equipment purchases to
expand its manufacturing capacities and research and development efforts
primarily in its telecommunications product lines. The Company also purchased
intellectual property totaling $550,000 for its telecommunications product
group. The Company expects to continue to expand its worldwide manufacturing
capacity, primarily for telecommunication products by investing approximately $5
million in capital expenditures for the remainder of fiscal 1998.
The Company generated $5.1 million from financing activities during
fiscal 1998 due primarily to the exercise of stock options and the sale of stock
through an employee stock purchase plan. Cash used for
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financing activities include the repayment of $6.1 million of notes payable
originating from the acquisition of Uniphase Fibreoptic Products in fiscal 1996.
The Company has a $5.0 million revolving line of credit with a bank.
There were no borrowings under the line of credit at March 31, 1998. Advances
under the line of credit bear interest at the bank's prime rate (8.5% at March
31, 1998) and are secured by inventories and accounts receivable. Under the
terms of the line of credit agreement, the Company is required to maintain
certain minimum working capital, net worth, profitability levels and other
specific financial ratios. In addition, the agreement prohibits the payment of
cash dividends and contains certain restrictions on the Company's ability to
borrow money or purchase assets or interests in other entities without the prior
written consent of the bank. The line of credit expires on January 28, 1999.
The Company believes that its existing cash balances and short-term
investments, together with cash flow from operations and available line of
credit will be sufficient to meet its liquidity and capital spending
requirements at least through the end of calendar year 1998. However, possible
acquisitions of businesses, products or technologies may require additional
financing prior to such time. There can be no assurance that additional
financing would be available when required or, if available, would be on terms
satisfactory to the Company.
RISK FACTORS
Management of growth
In November and March 1997, the Company acquired UFC and ULE,
respectively. In addition, in April 1998, the Company announced the signing of a
letter of intent to acquire Philips Optoelectronics B.V., a unit of Philips N.V.
that develops, manufactures and markets high performance semiconductor laser and
components for telecommunications, CATV, multimedia and printing markets. This
pending acquisition is subject to a number of contingencies including the
negotiation of a definitive agreement, satisfactory completion of due diligence
and customary closing conditions. As a result, there can be no assurance such
acquisition will be consummated. The Company's ability to manage its growth
effectively is dependent upon its ability to integrate into the Company the
acquired entities' operations, products and personnel, retain key personnel of
the acquired entity and to expand the Company's financial and management
controls and reporting systems and procedures. There can be no assurance that
the Company will be able to successfully manage such growth, and failure to do
so could have a material adverse effect on the Company's business and operating
results.
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, 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
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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 prices of these products relative to the Company's
other products. In addition, the Company sells its telecommunications equipment
products to Original Equipment Manufacturers (OEMs) who typically order in large
quantities and therefore the timing of such sales may significantly affect the
Company's quarterly results. The timing of such OEM sales can be affected by
factors beyond the Company's control, including demand for the OEMs' products
and manufacturing issues experienced by OEMs. In this regard, the Company has
historically experienced rescheduling of orders by customers in each of its
markets and may experience such rescheduling in the future. 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 any particular quarter may also be
affected by the acquisition or disposition of other businesses, products or
technologies by the Company. For example, in the second quarter of fiscal 1998,
the Company incurred charges totaling $6.6 million for acquired in-process
research and development in connection with the acquisition of UFC. 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 Uniphase Laser Enterprise ("ULE"). The Company recently announced it
anticipates reporting an operating loss for both the quarter and fiscal year
ended June 30, 1998 resulting from the acquisition of Philips Optoelectronics,
B.V. 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.
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 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
may lead certain of the Company's customers to delay or cancel purchase of the
Company's Ultrapointe Systems. Results of operations for the nine months ended
March 31, 1997 include $13.8 million in sales of Ultrapointe products as
compared to $9.9 million for the comparable period in fiscal 1997. There can be
no assurance that the Company's operating results will not be materially and
adversely affected by the recent downturn in the semiconductor industry.
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 of 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.
Dependence on Key OEM Relationships
In July 1997, the Company entered into an exclusive OEM Agreement (the
"Agreement") with KLA-Tencor Corporation pursuant to which KLA-Tencor
Corporation distributes Ultrapointe Systems through its worldwide distribution
channels. This Agreement supercedes prior OEM understandings and agreements with
Tencor Instruments, a predecessor of KLA-Tencor Corporation regarding the
Companies'
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business relationship. The Company currently expects that KLA-Tencor Corporation
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.
On April 30, 1997, Tencor Instruments and KLA Instruments, Inc. 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 because of 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 7%, 12% and
12% of the Company's net sales for the first nine months of fiscal 1998 , fiscal
year 1997 and 1996, respectively. One telecommunications customer, CIENA
Corporation, accounted for approximately 12% of the Company's net sales for the
first nine months of fiscal 1998.
The loss or delay of orders from these or other OEM customers could have
a materially adverse effect on the Company's business and operating results.
Customer Concentration
A relatively limited number of OEM customers historically have accounted
for a substantial portion of the Company's telecommunications net sales. Sales
to any single customer are also subject to significant variability from quarter
to quarter. Such fluctuations could have a material adverse effect on the
Company's business, operating results or financial condition. The Company
expects that sales of telecommunications products to a limited number of
customers will continue to account for a high percentage of net sales for the
foreseeable future. Moreover, there can be no assurance that current customers
will continue to place orders or that the Company will be able to obtain new
orders from new customers.
Future Capital Requirements
The Company is devoting substantial capital spending for new facilities
and equipment for Uniphase Laser Enterprise and to the development of certain
other new products for the 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 its 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.
Intense Industry Competition
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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 markets 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 telecommunication and the semiconductor capital equipment markets are
frequently affected by new product introductions and new technologies that make
existing production and products obsolete. 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.
Declining Market for Gas Lasers; Development and Other Risks Relating to Solid
State Laser Technologies
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 of solid
state lasers and are competing with evaluation units for many of the same
design-in opportunities that 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
such 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.
Hiring and Retention of 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 maintain a key person life insurance policy on the Chief
Executive Officer. 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
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could delay product development cycles or otherwise have a material adverse
effect on the Company's business and operating results.
Patents and Intellectual Property Rights
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 industries 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 the first nine months of fiscal 1998 and
fiscal 1997, the Company incurred $1.6 million, $1.2 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 regards to 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, 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
material and adverse 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 patents, 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 40 U.S. patents on products or processes
and certain corresponding foreign patents and has applications for certain
patents currently pending. While these patents have been issued, 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 products. There can be no assurance that
other companies are not investigating or developing other technologies that are
similar to the Company's, or that any filed, pending or issued patents 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
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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, Australia, 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 Optoelectronics, B.V., 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.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather that the year 2000. This could result in
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company utilizes various integrated systems and software packages
for the internal processing and control. In addition, certain of the Company's
products use software programs extensively. Based on Company's preliminary
assessment, the Company and its software vendors will need to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Company has begun to
assess and correct software programs to enable normal processing in the year
2000 and beyond. The cost which the Company may incur in such assessment and
correction has not yet been determined. In addition, there can be no assurance
that all of the modification and conversions to the Company's integrated systems
or software packages will be converted in time to meet processing requirements
in the year 2000. Failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition in the year 2000
and beyond.
The statements contained in this Report on Form 10-Q 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. Such forward looking statements include, but are not limited to,
statements regarding the Company's expectations, anticipations, 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 the "Risk Factors" portion as
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well as those set forth from time to time in the Company's Reports on Form 10-K,
10-Q and Annual Reports to Stockholders. 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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3. Legal Proceedings, in the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1997 and Part II, Item 1.
Legal Proceedings in the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997.
In December 1997, certain claims and counter claims previously filed
between Uniphase Telecommunications Products, Inc., ("UTP"), a subsidiary of the
Company, and Tacan Corporation ("TACAN") were settled. The settlement with TACAN
did not have a material effect on the Company's financial condition or results
of operations. In addition, all but two claims by former employees alleging
wrongful termination, fraud and termination in violation of public policy
against the Company were settled during the second quarter of fiscal 1998 for
insignificant amounts.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27. Financial Data Schedule
b) Reports on Form 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Uniphase Corporation
---------------------------------------------
(Registrant)
Date May 8, 1998 \s\ Anthony R. Muller
----------------- ---------------------------------------------
Anthony R. Muller,
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date May 8, 1998 \s\ Kevin Kalkhoven
----------------- ---------------------------------------------
Kevin N. Kalkhoven,
Chairman and Chief Executive Officer
(Principal Executive Officer)
20
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule