18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 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 January 31, 1997.
Common Stock $.001 par value 34,705,506
Class Number of Shares
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share
data) Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
Net sales $42,934 $22,683 $81,407 $46,146
Cost of sales 22,148 12,256 42,102 24,464
------- ------ ------ ------
Gross profit 20,786 10,427 39,305 21,682
Operating expenses:
Research and development 3,193 2,128 6,079 3,755
Royalty and license 490 416 975 825
Selling, general and
administrative 6,653 4,216 12,946 8,665
Acquired in-process research &
development 6,568 - - 6,568 - -
------ ----- ------ ------
Total operating expenses 16,904 6,760 26,568 13,245
------ ----- ------ ------
Income from operations 3,882 3,667 12,737 8,437
Interest and other income, net 760 982 1,522 1,928
----- ----- ------ ------
Income before income taxes 4,642 4,649 14,259 10,365
Income tax expense 3,979 1,513 7,393 3,628
----- ----- ------ ------
Net income $ 663 $3,136 $ 6,866 $ 6,737
====== ====== ======= =======
Basic earnings per share $ 0.02 $ 0.10 $ 0.20 $ 0.21
====== ====== ======= =======
Dilutive earnings per share $ 0.02 $ 0.09 $ 0.19 $ 0.19
====== ====== ======= =======
See accompanying notes
UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, June 30,
1997 1997
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $30,308 $ 29,186
Short-term investments 54,564 52,009
Accounts receivable, less allowances for
returns and doubtful accounts of $332 at
December 31, 1997 and $1,877 at June 30, 1997 25,063 20,317
Inventories 19,180 18,668
Refundable income taxes 4,852 6,010
Deferred income taxes and other current assets 8,793 7,525
------- -------
Total curret assets 142,760 133,715
Property, plant and equipment, net 39,996 31,251
Intangible assets 10,586 10,969
Long-term deferred income taxes and other assets 1,748 1,644
-------- --------
Total assets $195,090 $177,579
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ -- $ 6,061
Accounts payable 8,609 4,781
Accrued payroll and related expenses 5,230 4,528
Income taxes payable 5,512 5,049
Other accrued expenses 5,709 4,908
------ ------
Total current liabilities 25,060 25,327
Accrued pension and other employee benefits 2,508 2,392
Other non-current liabilities 135 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 - 34,612,348
at December 31, 1997 and 33,843,934 at
June 30, 1997 35 34
Additional paid-in capital 167,566 156,864
Retained earnings (deficit) (238) (7,104)
Net unrealized gain on securities available-
for-sale 50 11
Foreign currency translation adjustment (26) (28)
--------- --------
Total stockholders' equity 167,387 149,777
-------- --------
Total liabilities and stockholders' equity $195,090 $177,579
======== ========
See accompanying notes
UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Six Months Ended
December 31,
1997 1996
Operating activities
Net income $6,866 $ 6,737
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,888 2,233
Stock compensation expense 525 --
Acquired in-process research and development 6,568 --
Change in operating assets and liabilities:
Accounts receivable (4,529) 460
Inventories (452) (5,545)
Deferred income taxes and other current
assets -- 1,823
Accounts payable, accrued liabilities and
other current liabilities 12,062 (49)
------ -------
Net cash provided by operating activities 24,928 5,659
------ -------
Investing activities
Purchase of short-term investments (39,951) (69,432)
Proceeds from sale of short-term investments 37,435 42,025
Purchase of property, plant and equipment (11,228) (5,345)
Acquisition of INDX, net of cash acquired (6,696) --
Purchase of intellectual property (550) --
Increase in other assets (78) --
-------- --------
Net cash used in investing activities (21,068) (32,752)
-------- --------
Financing activities
Repayment of notes payable (6,061) (548)
Proceeds from issuance of common stock under stock
option and stock purchase plans 3,323 2,172
-------- ------
Net cash provided by (used in) financing activities (2,738) 1,624
Increase (decrease) in cash and cash equivalents 1,122 (25,469)
Cash and cash equivalents at beginning of period 29,186 52,463
------ -------
Cash and cash equivalents at end of period $30,308 $26,994
======= =======
Supplemental Cash Flow Information
Tax benefits from stock option and stock purchase
plans $ 6,854 $6,126
======= ======
See accompanying notes
UNIPHASE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Business Activities and Basis of Presentation
The financial information at December 31, 1997 and for the three
and six month periods ended December 31, 1997 and 1996 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 six month periods ended December 31,
1997 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, the 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, the 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 SFAS 130 and
131 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 rate used for the second quarter and the first
six months of fiscal 1998 were 85.7% and 51.9% compared to 32.5% and
35% used in the same periods of fiscal 1997. The 1998 tax rates are
higher due to the non-deductible acquired in-process research and
development expenses.
Inventories
Inventories consist of the following:
December 31, June 30,
(in thousands) 1997 1997
Raw materials and purchased parts 8,472 5,876
Work in process 6,937 10,468
Finished goods 3,771 2,324
------ ------
$19,180 $18,668
======= =======
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.
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
Denominator for basic earnings
per share-weighted average
shares 34,467 32,694 34,240 32,520
Effect of dilutive securities:
Stock options outstanding 2,526 2,790 2,587 2,714
------ ------ ------ ------
Denominator for diluted
earnings per share 36,993 35,484 36,827 35,234
====== ====== ====== ======
Net income $ 663 $ 3,136 $ 6,866 $ 6,737
======= ======= ======= =======
Basic earnings per share $ 0.02 $ 0.10 $ 0.20 $ 0.21
======= ======= ======= =======
Dilutive earnings per share $ 0.02 $ 0.09 $ 0.19 $ 0.19
======= ======= ======= =======
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. All but two claims were settled for
insignificant amounts during the second quarter of fiscal 1998. 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.
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.
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 INDX Pty Ltd.
On November 26, 1997, the Company acquired 100% of the capital
stock of INDX Pty Ltd. (INDX) and obtained certain licensing rights
from Australia Photonics Pty Limited (AP). INDX 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 INDX subsequent to the acquisition
date. The purchase price was allocated to the net assets and the in-
process research an 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
========
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 November 26, 1997, the Company acquired 100% of the capital
stock of INDX Pty Ltd. (INDX) 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. Other than the in-process charge, INDX's
results of operations for both the quarter and six-month period ended
December 31, 1997 were insignificant to the overall Company.
Net Sales
In the second quarter of fiscal 1998, ended December 31, 1997, net
sales were $42.9 million, which represented a $20.2 million or 89%
increase over net sales of $22.7 million reported for the second
quarter of fiscal 1997. For the first six months of fiscal 1998, net
sales were $81.4 million, which represented a $35.3 million or 76%
increase over net sales of $46.1 million in the same period of fiscal
1997. The increase in net sales for the quarter and six-month periods
were primarily due to increased sales of $17.3 million and $32.1
million, respectively of the Company's telecommunications products.
Results for the six month period ended December 31, 1997 included the
operations of Uniphase Laser Enterprise (ULE) which accounted for 21%
of telecommunication product sales and was acquired in a purchase
transaction in March 1997 from IBM's Zurich Research Laboratory in
Switzerland. Net sales increased $4.4 million or 12% over the first
quarter of fiscal 1998 amount of $38.5 million, primarily due to sales
growth in certain telecommunications products. Sales of the Company's
lasers subsystems, primarily argon lasers, increased approximately $1.1
million for both the quarter and six month periods ended December 31,
1997. The Company's Ultrapointe division experienced an increase in
sales during first six months of fiscal 1998 of approximately $2.1
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 second
half of fiscal 1998 as compared to the first half of fiscal 1998
resulting from ongoing unsettled semiconductor markets in the Pacific
Rim.
Gross Profit
In the second quarter of fiscal 1998, the Company's gross profit
increased 99% to $20.8 million or 48% of net sales from $10.4 million
or 46% of net sales in the same period of fiscal 1997. For the first
six months of fiscal 1998, gross profits increased 81% to $39.3 million
or 48% of net sales from $21.7 million or 47% of net sales in the same
period of fiscal 1997. The increase in gross profit over fiscal 1997
for the quarter and the six month period is due to increased sales of
certain high margin products, including the products of ULE. Gross
profit increased $2.3 million or 12% over the first quarter of fiscal
1998.
Gross margin for the second quarter of fiscal 1998 includes
the 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 which
temporarily reduced production capacity at these facilities. The
Company anticipates its modulator retooling efforts will continue into
the third quarter of fiscal 1998, and the new Zurich manufacturing
facility will be fully operational by the end of fiscal 1998. Reduced
sales of Ultrapointe systems may 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 second quarter of fiscal 1998, research and development
(R&D) expense was $3.2 million or 7% of net sales which represented a
$1.1 million or 50% increase over R&D expense of $2.1 million or 9% of
net sales in the second quarter of fiscal 1997. For the first six
months of fiscal 1998, research and development expense was $6.1
million or 7% of net sales which represents a $2.3 million or 62%
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 product lines. R&D expense increased
$300,000 or 11% over the first quarter of fiscal 1998 resulting from
increases in development costs for telecommunications products offset
in part by a decline in R&D expenses by Ultrapointe. 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 second quarter of fiscal 1998, royalty and license expenses
of $490,000 was consistent with the same quarter in fiscal 1997 and the
first quarter of fiscal 1998. However, these expenses decreased as a
percentage of net sales to 1% in the quarter ended December 31, 1997 as
compared to 2% in the same period in fiscal 1997. For the first six
months of fiscal 1998, royalty and license expense of $975,000 was
comparable to the corresponding fiscal 1997 amount of $825,000, and
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 revenues
being derived from certain royalty-free telecommunication products.
The Company continues to develop products in solid state laser,
telecommunications 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 second quarter of fiscal 1998, selling, general and
administrative (SG&A) expense was $6.7 million or 16% of net sales,
which represented a $2.4 million or 58% increase over SG&A expense of
$4.2 million or 19% of net sales in the second quarter of fiscal 1997.
For the six months of fiscal 1998, SG&A expense was $13.0 million or
16% of net sales which represented a $4.3 million or 49% increase over
SG&A expense of $8.7 million or 19% of net sales in the same period of
fiscal 1997. SG&A expense increased $400,000 or 6% over the first
quarter of fiscal 1998 amount of $6.3 million. The increase is due
primarily to increased sales and administrative support costs for
telecommunications products, including additional expenses associated
with the ULE business and increased business development costs.
Interest and Other Income, Net
In the second quarter of fiscal 1997, interest and other income,
net was $760,000, which represented a $222,000 decrease from $982,000
in the second quarter of fiscal 1997. For the first six months of
fiscal 1998, interest and other income, net decreased to $1.5 million
from $1.9 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 INDX and certain licensing rights in November, 1997.
Income Taxes
The effective tax rate used for the second quarter and the first
six months of fiscal 1998 were 85.7% and 51.9% compared to 32.5% and
35% used in the same periods of fiscal 1997. The 1998 tax rates are
higher due to the non-deductible acquired in-process research and
development expenses.
Liquidity and Capital Resources
At December 31, 1997 the Company's combined balance of cash, cash
equivalents and short-term investments was $84.9 million. The Company
has met its liquidity needs during fiscal 1998 primarily through cash
generated from operating activities totaling $24.9 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 $7.1 million generated
from reductions in net working capital.
Cash used in investing activities was $21.1 million for the first
six months of fiscal 1998. The Company's acquisition of INDX accounted
for $6.7 million of investing activity. The Company incurred capital
expenditures of $11.2 million primarily in facilities improvements and
equipment purchases to expand its manufacturing capacities and research
and development efforts primarily in its telecommunication 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 $20 million in capital expenditures
for the remainder of fiscal 1998.
The Company generated $3.3 million during fiscal 1997 due primarily
to the exercise of stock options and the sale of stock through an employee
stock purchase plan. Cash used for 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 December
31, 1997. Advances under the line of credit bear interest at the
bank's prime rate (8.5% at December 31, 1997) 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 existing 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
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 six months ended December 31, 1997 include $9.3
million in sales of Ultrapointe products as compared to $7.2 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 of indicative of a
meaningful trend, which may materially and adversely affect 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 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 Indx. 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.
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' 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 10%,
12% and 12% of the Company's net sales for current six months, fiscal
years, 1997, 1996, and 1995, respectively. One telecommunications
customer, CIENA Corporation, accounted for approximately 13% of the
Company's net sales for the first six 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
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 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
Gas laser subsystems sales accounted for 22.7%, 33.1% and 47.7% of
total Company's sales for the first six months of fiscal 1998 and for
fiscal years 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 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 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 six months of fiscal 1998 and for fiscal 1997
and 1996, the Company incurred $975,000, $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 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 30
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
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, 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 Issue
The Year 2000 Issue results from computer programs being written
using two digits rather than four to define the applicable year. Any of
Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. Such a
misinterpretaion could result in system failure or miscalculation causing
disruptions of operations, including, among other thins, 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 internal processing and control. In addition, certain of the Company's
products use software programs extensively. Based on the 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 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
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.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders (Special Meeting) was held on
October 16, 1997. At the Special Meeting, an amendment to increase
the aggregate number of shares of common stock which the Company is
authorized to issue from 20,000,000 to 50,000,000 shares was approved
as follows: 10,941,022 shares for and 12,149 withheld.
The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on November 11, 1997. At the Company's Annual
Meeting, Casimar S. Skrzypczak was elected to Class III of the Board
of Directors to serve a two year term and Robert C. Fink, Stephen C.
Johnson and Anthony R. Muller were elected to Class I of the Board of
Directors to serve three year terms. The terms of each of the
following directors continued after the Annual Meeting: William B.
Bridges, Wilson Sibett, Kevin N. Kalkhoven and Catherine P. Lego. On
January 19, 1998 Anthony R. Muller resigned as a member of the Board
of Directors.
At the Annual Meeting, two items were put to a vote of the
stockholders:
1. The election of three Class I directors and one Class III director
of the Company to serve until the 2000 and 1999 Annual Meeting of
Stockholders, respectively, and until their successors are elected and
qualified;
2. The appointment of Ernst & Young LLP as the independent auditors
for the Company for the fiscal year ending June 30, 1998.
The voting results were:
Item For Against Abstained
1. Directors
Casimir S. Skrzypczak 12,129,934 0 0
Robert C. Fink 12,129,934 0 0
Stephen C. Johnson 12,129,934 0 0
Anthony R. Muller 12,129,934 0 0
2. Appointment of auditors 12,119,818 6,883 16,133
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
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 February 6, 1998 \s\ Anthony R. Muller
------------------------------------
Anthony R. Muller,
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date February 6, 1998 \s\ Kevin N. Kalkhoven
------------------------------------
Kevin N. Kalkhoven,
Chairman and Chief Executive Officer
(Principal Executive Officer)