UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 0-22874 94-2579683
(State of Other (Commission File (IRS Employer Identification
Jurisdiction No.) No.)
of Incorporation)
163 Baypointe Parkway, San Jose, California 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 November 9, 1998.
Common Stock $.001 par value 38,737,885
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
September 30,
---------------------
1998 1997
---------- ----------
Net sales.............................. $57,420 $40,022
Cost of sales.......................... 28,898 20,520
---------- ----------
Gross profit......................... 28,522 19,502
---------- ----------
Operating expenses:
Research and development............. 5,663 3,009
Royalty and license.................. 428 485
Selling, general and administrative.. 10,527 6,788
---------- ----------
Total operating expenses............... 16,618 10,282
---------- ----------
Income from operations................. 11,904 9,220
Interest and other income, net......... 919 762
---------- ----------
Income before income taxes........... 12,823 9,982
Income tax expense..................... 4,675 3,414
---------- ----------
Net income............................. $8,148 $6,568
========== ==========
Basic earnings per share............... $0.21 $0.19
========== ==========
Dilutive earnings per share............ $0.19 $0.17
========== ==========
Weighted average common shares
Outstanding.......................... 39,112 35,095
Dilutive effect of stock options
Outstanding.......................... 3,156 2,694
---------- ----------
Weighted average common shares
Outstanding, assuming dilution....... 42,268 37,789
========== ==========
See accompanying notes
UNIPHASE CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, June 30,
1998 1998
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents......................... $31,479 $40,525
Short-term investments............................ 75,627 54,831
Accounts receivable, less allowances for returns
and doubtful accounts of $809 at September 30,
1998 and $809 at June 30, 1998.................. 40,032 41,922
Inventories....................................... 24,207 22,137
Deferred income taxes............................. 4,321 4,321
Other current assets.............................. 3,718 4,859
------------ ------------
Total current assets........................... 179,384 168,595
Property, plant, and equipment, net.................. 65,246 57,191
Intangible assets, including goodwill................ 104,098 102,979
Long term deferred income taxes and other assets..... 4,221 4,106
------------ ------------
Total assets................................... $352,949 $332,871
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable..................................... $1,916 $ --
Accounts payable.................................. 15,815 15,784
Accrued payroll and related expenses.............. 6,611 7,793
Income taxes payable.............................. 4,550 7,697
Other accrued expenses............................ 13,302 15,893
------------ ------------
Total current liabilities...................... 42,194 47,167
Accrued pension and other non-current liabilities.... 6,505 5,666
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 100,000 at
September 30, and June 30, 1998................ -- --
Common stock, $0.001 par value
Authorized shares - 50,000,000
Issued and outstanding shares - 38,658,857
at September 30, 1998 and 38,919,966 at
June 30, 1998.................................. 39 39
Additional paid-in capital........................ 318,181 307,447
Accumulated deficit............................... (18,096) (26,118)
Other stockerholders' equity...................... 4,126 (1,330)
------------ ------------
Total stockholders' equity..................... 304,250 280,038
------------ ------------
Total liabilities and stockholders' equity..... $352,949 $332,871
============ ============
See accompanying notes
UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
----------------------
1998 1997
---------- ----------
Operating activities
Net income........................................... $8,148 $6,568
UBP net income for the three months ended
September 30, 1997................................. -- (365)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation expense and amortization.............. 8,338 1,939
Stock compensation expense......................... 123 262
Change in operating assets and liabilities:
Accounts receivable............................. 1,890 (4,527)
Inventories..................................... (2,069) (556)
Deferred income taxes and other current assets.. 1,141 (255)
Accounts payable, accrued liabilities and
other current liabilities..................... (2,182) 6,793
---------- ----------
Net cash provided by operating activities.............. 15,389 9,859
---------- ----------
Investing activities
Purchase of short-term investments................... (75,617) (24,398)
Proceeds from sale of short-term investments......... 55,072 25,922
Acquisition of Chassis Engineering................... (112) --
Purchase of property, plant and equipment............ (8,542) (3,667)
Purchase of intellectual property.................... -- (500)
Increase in other assets............................. (115) (59)
---------- ----------
Net cash used in investing activities.................. (29,314) (2,702)
---------- ----------
Financing activities
Repayment of notes payable........................... -- (6,061)
Proceeds from issuance of common stock under
stock option and stock purchase plans.......... 4,879 2,272
---------- ----------
Net cash provided by (used in) financing activities.... 4,879 (3,789)
---------- ----------
Increase (decrease) in cash and cash equivalents....... (9,046) 3,368
Cash and cash equivalents at beginning of period....... 40,525 29,727
---------- ----------
Cash and cash equivalents at end of period............. $31,479 $33,095
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Tax benefits from stock option and stock
purchase plans................................. $4,527 $4,364
Issuance of notes payable......................... $1,916 $--
See accompanying notes to consolidated financial statements.
UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business Activities and Basis of Presentation
The financial information at September 30, 1998 and for the
three-month period ended September 30, 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 in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
The results for the three-month period ended September 30, 1998
may not be indicative of results for the fiscal year ending June 30,
1999 or any future period.
Restatement of Financial Statements
On November 25, 1998, the Company acquired Broadband
Communications Products, Inc. ("BCP") in a pooling of interests
transaction. The Company exchanged 729,510 shares of common stock for
all the outstanding shares of BCP common stock and reserved 418,482
shares for issuance on exercise of BCP options assumed by the Company.
Merger related expenses during the second quarter of fiscal 1999
totaled $5.9 million primarily for legal and accounting services and
fees paid to BCP's financial advisors which were expensed in the
quarter ended December 31, 1998, the quarter in which the transaction
closed. The financial information for the three-month period ended
September 30, 1997 and at June 30, 1998 has been restated to include
the financial position, results of operations and cash flows of BCP
for the corresponding periods. There were no transactions between BCP
and the Company prior to the combination and no significant
adjustments were necessary to conform BCP's accounting policies.
Because of differing year ends, financial information relating to
Uniphase's fiscal years ended June 30, 1997 and 1996 has been combined
with financial information relating to BCP's years ended December 31,
1997 and 1996, respectively. The consolidated statement of cash flows
for the three month period ended September 30, 1997 includes an
adjustment of $365,000 to reduce cash flow from operations for the
income of BCP for the three months ended September 30, 1997 which is
included in the results of operations twice. Net sales and net income
of BCP for the three months ended December 31, 1997 which are included
in the Consolidated Statements of Income for both fiscal 1998 and 1997
were approximately $1.6 million and $365,000, respectively. Prior to
November 25, 1998, BCP was a subchapter S Corporation for income tax
purposes and, therefore, did not pay U.S. federal income taxes. BCP
will be included in the Company's U.S. federal income tax return
effective November 25, 1998. BCP's net taxable temporary differences
were insignificant as of the date of the merger. BCP will operate as
Uniphase Broadband Products, Inc. ("UBP").
The Company's acquisition of Uniphase Netherlands B.V. ("UNL")
was accounted for using the purchase method of accounting.
Accordingly, the total purchase price was allocated to the assets
acquired and liabilities assumed, including in-process research and
development based on their estimated fair values using valuation
methods believed to be appropriate at the time. The estimated fair
value of the in-process research and development of $93.0 million was
expensed in the fourth quarter of fiscal 1998 (the period in which the
acquisition was consummated). Subsequent to the Securities and
Exchange Commission's letter to the AICPA dated September 9, 1998,
regarding its views on in-process research and development, the
Company has re-evaluated its in-process research and development
charge with respect to the UNL acquisition, revised the purchase price
allocation and restated its financial statements. As a result,
Uniphase made an adjustment to its financial statements for the year
ended June 30, 1998 to decrease the amount of previously expensed in-
process research and development and increase the amount capitalized
as goodwill and other intangibles by $59.3 million. The financial
statements for the quarter ended September 30, 1998 have been restated
to reflect this change and increased amortization expense related to
this additional intangible asset by $2.1 million.
The effect of these adjustments on the consolidated financial
statements are as follows (in thousands, except per share data):
For the Three Months Ended
September 30, 1998
As Restated As Restated
for BCP for UNL
----------- -----------
Selling, general and administrative......... $8,410 $10,527
Total operating expenses.................... $14,501 $16,618
Net income.................................. $10,265 $8,148
Basic earnings per share.................... $0.26 $0.21
Dilutive earnings per share................. $0.24 $0.19
As of September 30, 1998
As Restated As Restated
for BCP for UNL
----------- -----------
Intangible assets, including goodwill....... $50,891 $108,074
Accumulated deficit......................... ($75,279) ($18,096)
Impact of Recently Issued Accounting Standards
The Company has adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," as
of the first quarter of fiscal 1999. SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its
components, however it has no impact on the Company's net income or
stockholders' equity. Comprehensive income consists of accumulated net
unrealized gain on available-for-sale investments and foreign currency
translation adjustments. These components of comprehensive income are
included in other stockholders' equity on the accompanying
consolidated balance sheets.
The components of comprehensive income, net of tax, are as follows
(in thousands):
Three Months Ended
September 30,
1998 1997
----------- -----------
Net income.................................. $8,148 $6,568
Change in unrealized gain on
available-for-sale investments............ 169 27
Change in foreign currency translation...... 3,513 17
----------- -----------
Comprehensive income........................ $11,830 $6,612
=========== ===========
In 1997, the Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information" was issued. In 1998, the Statement of Financial
Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" was issued. The
Company is required to adopt the provisions of SFAS 131 and 132 in
fiscal year 1999. These adoptions are not expected to affect results
of operations or financial position but will require either additional
disclosures or modifications to previous disclosures.
In 1998, the Statement of Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities" was also issued and is effective for fiscal years
commencing after June 15, 1999. The effect of adopting SFAS 133 is
currently being evaluated but is not expected to have a material
effect on the Company's financial position or results of operations.
Income Taxes
The effective tax rates used for the three-month periods ended
September 30, 1998 and 1997 were 36.5% and 34.2%, respectively.
Inventories
Inventories consist of the following (in thousands):
September June 30,
30, 1998 1998
---------- ----------
Raw materials and purchased parts........... $2,530 $2,865
Work in process............................. 16,021 11,998
Finished goods.............................. 5,656 7,274
---------- ----------
$24,207 $22,137
========== ==========
Earnings per Share
Earnings per share for fiscal 1998 has been restated to reflect
the 100% stock dividend paid November 12, 1997.
Acquisition of Chassis Engineering Inc.
In August 1998, the Company acquired certain assets of Chassis
Engineering Inc. ("Chassis") for $70,000 in cash and convertible debt
of $2.73 million. Chassis designs, develops, markets and manufactures
packaging solutions for fiber optic and other high performance
components. The convertible debt is composed of a discounted $1.92
million demand obligation and two performance-based instruments
totaling $800,000 that become due upon achieving certain milestones
over the ensuing 9 to 18 months. The convertible debt bears interest
at 5.48% and the principal can be exchanged for newly issued shares of
Uniphase common stock at a price of $55.083 per share. The convertible
debt is secured by a letter of credit issued against the Company's
unused revolving bank line of credit.
The effects of the Chassis acquisition on the fiscal 1999
interim consolidated statement of cash flows were as follows (in
thousands):
Working capital (deficiency) acquired.............. ($41)
Property and equipment............................. 25
Intangibles........................................ 2,044
---------------
Net assets acquired................................ $2,028
===============
Convertible debt issued............................ $1,916
Cash paid, including transaction costs............. 112
---------------
Total purchase price............................... $2,028
===============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Sales
In the first quarter of fiscal 1999, ended September 30, 1998,
net sales were $57.4 million, which represented a $17.4 million or 44%
increase over net sales of $40.0 million reported for the first
quarter of fiscal 1998. The increase in net sales reflected growth in
each of the Company's major product lines except Ultrapointe. The
results for the first quarter of fiscal 1999 include net sales of
Uniphase Netherlands and Uniphase Fiber Components which were acquired
on June 9, 1998 and November 26, 1997, respectively, in transactions
accounted for as purchases. Net sales increased $5.6 million or 11%
over the fourth quarter of fiscal 1998 amount of $51.8 million because
of the same factors. The Company's Ultrapointe division experienced a
decrease in sales during the first quarter of fiscal 1999 of
approximately $3.6 million from the prior calendar quarter primarily
because of a downturn in the semiconductor equipment industry. Sales
of Ultrapointe systems in the second quarter of fiscal 1999 are
expected to be comparable to or even below amounts achieved in the
first quarter of fiscal 1999. The Company is contemplating
divestiture or discontinuation of its Ultrapointe division, and either
outcome would cause a cessation of future Ultrapointe sales.
Results for the three-month period ended September 30, 1998 are
not considered indicative of the results to be expected for any future
period or for the entire year. In addition, there can be no assurance
that the market for the Company's products will grow in future periods
at its historical percentage rate or that certain market segments will
not decline. Further, there can be no assurance that the Company will
be able to increase or maintain its market share in the future or to
achieve historical growth rates.
Gross Profit
In the first quarter of fiscal 1999, the Company's gross profit
increased 46% to $28.5 million or 50% of net sales from $19.5 million
or 49% of net sales in the same period of fiscal 1998. Gross profit
increased over the first quarter of fiscal 1998 primarily due to
growth in each of the Company's major telecommunications product
lines. The increase in gross profit as a percent of sales over the
first quarter of fiscal 1998 largely reflects improved gross margins
from the Company's high volume telecommunications products and a $1.4
million reduction in excess manufacturing-related reserves, offset by
the lower gross margin rates of recently acquired businesses and the
effect of lower sales of the Company's Ultrapointe division.
In the first quarter of fiscal 1999, gross profit increased $5.9
million or 26% over the fourth quarter of fiscal 1998 amount of $22.6
million or 44% of net sales. The increase in gross profit as a
percent of net sales reflects the aforementioned reduction of excess
manufacturing-related reserves, offset by the lower gross margin rates
of recently acquired businesses and the margin impact of lower sales
by the Company's Ultrapointe division. Gross margin in the fourth
quarter of fiscal 1998 was reduced by certain charges for the
integration of Uniphase Netherlands and higher Ultrapointe inventory
provisions.
There can be no assurance that the Company will be able to
maintain its gross margins at current levels. In addition, reduced
sales of Ultrapointe systems may continue to have an adverse effect on
gross margin for the remainder of fiscal 1999. The Company expects
that there will continue to be periodic fluctuations in its gross
margins resulting from changes in its sales and product mix,
competitive pricing pressures, higher costs resulting from new
production facilities, manufacturing yields, acquisitions of
businesses that may have different margins than the Company,
inefficiencies associated with new product introductions, and a
variety of other factors.
Research and Development
In the first quarter of fiscal 1999, research and development
(R&D) expense was $5.7 million or 10% of net sales which represented a
$2.7 million or 90% increase over R&D expense of $3.0 million or 8% of
net sales in the first quarter of fiscal 1998. R&D expense increased
$1.1 million or 26% over R&D expense for the fourth quarter of fiscal
1998 which represented 9% of sales. The increases in R&D expenses as
a percentage of net sales over the comparison periods reflect the
higher R&D spending rates of recently acquired operations and certain
internal start-ups.
The Company anticipates that R&D expense will continue to
increase in amounts in future periods, although R&D expense may
fluctuate as a percentage of net sales. In addition, there can be no
assurance that expenditures for R&D will be successful or that
improved processes or commercial products will result from these
projects.
Royalty and License
In the first quarter of fiscal 1999, royalty and license expense
was $428,000 as compared to $485,000 in the first quarter of fiscal
1998 and $377,000 in the fourth quarter of fiscal 1998.
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 first quarter of fiscal 1999, selling, general and
administrative (SG&A) expense was $10.5 million or 18% of net sales,
which represented a $3.7 million or 54% increase over SG&A expense of
$6.8 million or 17% of net sales in the first quarter of fiscal 1998.
The increase in SG&A expense as a percentage of net sales from the
first quarter of the prior year is primarily due to amortization of
purchased intangibles arising from the UNL acquisition offset in part
by the elimination of the former UTP headquarters, lower amortization
resulting from the write-off of certain long-lived assets of UTP
Fibreoptics in the fourth quarter of fiscal 1998, a reduction in
certain accruals for employee benefit costs in the first quarter of
fiscal 1999, and reduced marketing and overhead costs of the
Ultrapointe division. SG&A expense decreased $12.0 million or 53%
from the fourth quarter of fiscal 1998 amount of $22.5 million
primarily due to certain reorganization and integration charges
recorded in connection with the acquisition of Uniphase Netherlands
in June 1998.
The Company expects the amount of SG&A expenses to increase in
the future, although such expenses may vary as a percentage of net
sales in future periods.
Interest and Other Income, Net
In the first quarter of fiscal 1999, interest and other income,
net was $919,000, which was comparable with interest income of
$762,000 and $979,000 reported in the first and fourth quarters of
fiscal 1998, respectively.
Income Taxes
The effective tax rate used for the first quarter of fiscal 1999
was 36.5% which is comparable to 34.2% used for the first quarter of
fiscal 1998.
Liquidity and Capital Resources
At September 30, 1998 the Company's combined balance of cash,
cash equivalents and short-term investments was $107.1 million. The
Company met its liquidity needs during the first quarter of fiscal
1999 primarily through cash generated from operating activities of
$15.4 million. Cash provided by operating activities is primarily the
result of net income before depreciation and amortization expense, and
lower accounts receivable, offset in part by increases in inventories
and decreases in accounts payable and accrued expenses.
Cash used in investing activities was $29.3 million in the first
quarter of fiscal 1999. The Company incurred capital expenditures of
$8.5 million primarily in facilities improvements and equipment
purchases to expand its manufacturing capacities primarily in its
telecommunications product lines. The Company expects to continue to
expand its worldwide manufacturing capacity, primarily for
telecommunication products, by investing approximately $27.0 million
in capital expenditures for the remainder of fiscal 1999.
The Company generated $4.9 million from financing activities
during the first quarter of fiscal 1999 from the exercise of stock
options and the sale of stock through its employee stock purchase
plan. In August 1998, the Company issued $1.9 million of promissory
notes in connection with the acquisition of Chassis Engineering, Inc.
(Chassis). The Company may be obligated to issue incremental notes
totaling up to $800,000 based on certain performance criteria of
Chassis over the next 9 to 18 months. See Notes to Consolidated
Financial Statements.
The Company has a $5.0 million revolving line of credit with a
bank. There were no borrowings under the line of credit at September
30, 1998. Advances under the line of credit bear interest at the
bank's prime rate (8.5% at September 30, 1998) and are unsecured.
Letters of credit totaling $2.1 million have been issued for certain
foreign facility leases and the notes issued for the purchase of
certain assets of Chassis that are collateralized by the line of
credit. 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 operating activities
and available line of credit will be sufficient to meet its liquidity
and capital spending requirements at least through the end of fiscal
1999. 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 fiscal 1998 the Company acquired Uniphase Australia (UFC) and
Uniphase Netherlands (UNL), and in August 1998 acquired certain assets of
Chassis. 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 a limited number of 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.
The Company's ability to forecast its quarterly operating
results can be affected by factors beyond the Company's control. The
Company's net sales often reflect orders shipped in the same quarter
that they are received. Near the end of a particular quarter,
customers may cancel orders, reschedule shipments or the Company may
experience production difficulties that could delay or reduce
shipments. The Company frequently ships more CATV product in the third
month of each quarter than in either of the first two months of the
quarter, and shipments in the third month generally are higher at the
end of the month. This pattern is likely to continue. The timing of
sales of the Company's Ultrapointe Systems may also 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. As a result of the above factors, the
Company's results of operations are subject to significant variability
from quarter to quarter.
The acquisition or disposition of other businesses, products or
technologies may also affect the Company's operating results in any
particular quarter. For example, in the second and fourth quarters of
fiscal 1998, the Company incurred charges of $6.6 million and $33.7
million, respectively for acquired in-process research and development
in connection with the acquisitions of UFC and UNL. In the third
quarter of fiscal 1997, the Company incurred charges of $33.3 million
for acquired in-process research and development in connection with
the acquisition of Uniphase Laser Enterprise (ULE). In addition, the
Company incurred other charges in connection with acquisitions
consummated in fiscal 1998 and 1997. The Company is contemplating
divestiture or discontinuation of its Ultrapointe division, and either
outcome could adversely affect the Company's net income in future
periods. There can be no assurance that acquisitions or dispositions
of businesses, products or technologies by the Company in the future
will not result in reorganization of its operations, substantial
charges or other expenses that may cause fluctuations in the Company's
quarterly operating results and its cash flows.
Cyclicality of Semiconductor Industry
The Company's Ultrapointe Systems and a portion of its laser
subsystems business 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. The semiconductor industry continues to experience a
downturn and the Company expects the downturn to continue, which may
lead certain of the Company's customers to delay or cancel purchase of
the Company's Ultrapointe Systems. The Company is contemplating the
divestiture of its Ultrapointe division or discontinuing its
operations. Results of operations for fiscal 1998 include $19.3
million in sales of Ultrapointe products as compared to $15.4 million
in fiscal 1997. There can be no assurance that the Company's operating
results will not be materially and adversely affected should the
Company divest or terminate the operations of Ultrapointe amidst the
current 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 which may materially and
adversely affect the Company's business and operating results or that
the current backlog of Ultrapointe products will result in actual
sales or that such backlog is indicative of a meaningful trend.
Risks from Customer Concentration
A relatively limited number of OEM customers historically have
accounted for a substantial portion of net sales from
telecommunications products. 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 to a limited number of customers will continue to
account for a high percentage of the net sales for the foreseeable
future. Moreover, there can be no assurance that current customers
will continue to place orders or that the Company will be able to
obtain new orders from new telecommunications customers.
In the first quarter of fiscal 1999, CIENA Corporation accounted
for 10% of net sales. CIENA accounted for approximately 11% of the
Company's net sales for fiscal 1998. One additional customer, KLA-
Tencor Corporation, purchased both laser subsystems and Ultrapointe
systems and accounted for 11% of the Company's consolidated net sales
in 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.
Year 2000
The Company is aware of the risks associated with the operation
of information technology ("IT") and non-information technology ("non-
IT") systems as the millennium (year 2000) approaches. The "Year 2000"
problem is pervasive and complex, with the possibility to affect many
IT and non-IT systems, and is the result of the rollover of the two
digit year value from "99" to "00". Systems that do not properly
recognize such date-sensitive information could generate erroneous
data or fail. In addition to the Company's own systems the Company
relies, directly and indirectly, on external systems of its customers,
suppliers, creditors, financial organizations, utilities providers and
government entities, both domestic and international (collectively,
"Third Parties"). Consequently, the Company could be affected by
disruptions in the operations of Third Parties with which the Company
interacts. Furthermore, the purchasing frequency and volume of
customers or potential customers may be affected by Year 2000
correction efforts as companies expend significant efforts to make
their current systems Year 2000 compliant.
The Company is using both internal and external resources to
assess (a) the Company's state of readiness (including the readiness
of Third Parties, with which the Company interacts) with respect to
the Year 2000 problem, (b) the costs to the Company to correct Year
2000 problems related to its internal IT and non-IT systems, which, if
uncorrected, could have a material adverse effect on the business,
financial condition or results of operations of the Company, (c) the
known risks related to the consequences of any failure to correct any
Year 2000 problems identified by the Company, and (d) the contingency
plans, if any, that should be adopted by the Company should any
identified Year 2000 problems not be corrected. The Company continues
to evaluate the estimated costs associated with the efforts to prepare
for Year 2000 based on actual experience. While the efforts will
involve additional costs, the Company believes, based on available
information, that it will be able to manage its total Year 2000
transition without any material adverse effect on its business
operations, products or financial prospects. The actual outcomes and
results could be affected by future factors including, but not limited
to, the continued availability of skilled personnel, cost control, the
ability to locate and remediate software code problems, critical
suppliers and subcontractors meeting their commitments to be Year 2000
compliant, and timely actions by customers. The Company anticipates
that it will remediate all Year 2000 risks and be able to conduct
normal operations without having to establish a Year 2000 contingency
plan.
The Company is currently working with the applicable suppliers
of its software systems and anticipates that certain of these systems
are currently not Year 2000 compliant, but anticipates that such
systems will be corrected for the Year 2000 problem prior to December
31, 1999. The Company is currently working with those Third Parties to
identify any Year 2000 problems affecting such Third Parties that
could have a material adverse affect on the Company's business,
financial condition or results of operations. However, it would be
impracticable for the Company to attempt to address all potential Year
2000 problems of Third Parties that have been or may in the future be
identified. Specifically, Year 2000 problems have been or may in the
future be identified with respect to the IT and non-IT systems of
Third Parties having widespread national and international
interactions with persons and entities generally (for example, certain
IT and non-IT Systems of governmental agencies, utilities and
information and financial networks) that, if uncorrected, could have a
material adverse impact on the Company's business, financial condition
or results of operations. The Company is still assessing the effect
the Year 2000 problem will have on its suppliers and, at this time,
cannot determine such impact.
Euro Currency
On January 1, 1999, several member countries of the European
Union will establish fixed conversion rates between their existing
sovereign currencies and adopt the Euro as their new common legal
currency. As of that date, the Euro will trade on currency exchanges
and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1999
and January 1, 2002. During the transition period, noncash payments
can be made in the Euro, and parties can elect to pay for goods and
services and transact business using either the Euro or a legacy
currency. Between January 1, 2002 and July 1, 2002 the participating
countries will introduce Euro notes and coins and withdraw all legacy
currencies so that they will no longer be available. The Euro
conversion may affect cross-border competition by creating cross-
border price transparency. The Company is assessing its
pricing/marketing strategy in order to insure that it remains
competitive in a broader European market. The Company is also
assessing its information technology systems to allow for transactions
to take place in both the legacy currencies and the Euro and the
eventual elimination of the legacy currencies, and reviewing whether
certain existing contracts will need to be modified. The Company's
currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the
Euro. Final accounting, tax and governmental legal and regulatory
guidance are not yet available. The Company will continue to evaluate
issues involving introduction of the Euro. Based on current
information and the Company's current assessment, it does not expect
that the Euro conversion will have a material adverse effect on its
business or financial condition.
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, such as statements relating to the possible
divestiture or discontinuation of the Ultrapointe division, future
anticipated R&D expenses of the Company, expectations as to the
continual downturn of the semiconductor industry and expectations as
to sales to a limited number of customers continuing to account for a
high percentage of the Company's sales. Actual results could differ
materially from those projected in any forward-looking statements as a
result of a change in the Company's policies or current intentions, as
well as a number of other 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,
1998 and Part II, Item 1.
Item 2. Changes in Securities
In August 1998, the Company acquired certain assets of Chassis
for $70,000 in cash and $2.73 million of convertible debt. Such
convertible debt was issued pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended. The
convertible debt is composed of a discounted $1.92 million demand
obligation and two performance-based instruments totaling $800,000
that become due upon achieving certain milestones over the ensuing 9
to 18 months. The convertible debt bears interest at 5.48% and the
principal can be exchanged for newly issued shares of Uniphase common
stock at a price of $55.083 per share. The convertible debt is secured
by a letter of credit issued against the Company's revolving bank line
of credit.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended September 30, 1998, no matters were
submitted for stockholders' vote.
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
The Company filed reports on form 8-K/A on August 24, 1998 and
form 8-K/A Amendment 1 on August 25, 1998 reporting the purchase of
Uniphase Netherlands B.V. and including the audited financial
statements of Philips Optoelectronics, B.V., a division of Koninklijke
Philips Electronics, N.V. in accordance with Rule 3.05 of Regulation
S-X and the pro forma financial information required by Article 11 of
Regulation S-X.
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 April 28, 1999 \s\ Anthony R. Muller
Anthony R. Muller, Senior Vice President and CFO
(Principal Financial and Accounting Officer)