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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<Table>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from to .
</Table>
COMMISSION FILE NUMBER 0-22874
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JDS UNIPHASE CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 94-2579683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 BAYPOINTE PARKWAY, SAN JOSE, CA 95134
(Address of principal executive offices) (Zip code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 434-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 23, 2001, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $9.3 billion based upon
the closing prices of the Common Stock and Exchangeable Shares as reported on
The Nasdaq National Market and The Toronto Stock Exchange, respectively, on such
date. Shares of Common Stock held by officers, directors and holders of more
than 5% of the outstanding Common Stock have been excluded from this calculation
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of August 23, 2001, the Registrant had 1,324,211,931 shares of Common
Stock outstanding, including 153,553,002 Exchangeable Shares.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Certain information required in Part III hereto is incorporated by
reference to the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
JDS Uniphase Corporation is a high technology company that designs,
develops, manufactures and distributes fiber optic components, modules and
subsystems for the fiber optic communications industry. These products are
deployed in advanced optical communications networks for the telecommunications
and cable television industries. Incorporated in Delaware in October 1993, we
are the product of several substantial mergers and acquisitions, including,
among others, the combination of Uniphase Corporation and JDS FITEL Inc. to form
JDS Uniphase Corporation on June 30, 1999, and the subsequent acquisitions of
Optical Coating Laboratory, Inc. ("OCLI") on February 4, 2000, E-TEK Dynamics,
Inc. ("E-TEK") on June 30, 2000 and SDL, Inc. ("SDL") on February 13, 2001.
Fiber optic communications systems deliver voice, video, audio and text
data information over high-capacity fiber optic cables. Although ultimately
highly complex, a fiber optic communications system performs three basic
functions common to all communications systems: transmitting, receiving and
routing (switching) information, in this case information encoded on light
signals. Our products, fiber optic components, modules and subsystems, alone and
in combinations, perform all of these functions and are the building blocks of
fiber optic communications systems. We sell our products to the world's leading
and emerging telecommunications networking and cable television system
providers. These companies include established industry participants, such as
Alcatel, Ciena, Cisco, Corning, Lucent, Marconi, Motorola, Nortel, Siemens and
Tyco, along with emerging companies, such as Corvis, ONI Systems, Juniper
Networks and Sycamore. In turn, the system providers supply integrated systems
to telecommunications carriers such as AT&T, WorldCom, Qwest and Sprint.
Our component products include semiconductor lasers, high-speed external
modulators, transmitters, couplers, multiplexers, circulators, tunable filters,
optical switches and isolators for fiber optic applications. Our module and
subsystem level products include amplifiers, transponders, transceivers, optical
performance monitors and dispersion compensation modules. We also supply our
system provider customers with test instruments for both system production
applications and network installation.
We also sell a number of other products for applications outside the fiber
optic industry that use the same or similar technologies as those used in our
fiber optics products business. These additional products include commercial
lasers, advanced light interference pigments, optical display and projection
products, and gas cluster ion beam surface equipment used in a variety of
markets, including the semiconductor and biomedical industries.
INDUSTRY ENVIRONMENT AND OUR GLOBAL REALIGNMENT PROGRAM
INDUSTRY ENVIRONMENT
During the second half of the 1990s through calendar 2000, the fiber optic
communications industry experienced a period of considerable growth, and we
participated in that growth as a leading supplier in these markets. This growth
was attributable primarily to: (a) the introduction of wavelength division
multiplexing (WDM) technology (under which multiple light signals are
transmitted down a single optical fiber cable), which allowed the expansion of
fiber optic network capacity without the expense and time required to install
additional fiber cable; (b) the unprecedented growth during this period in data
traffic, in general, and the internet, in particular, which created
exponentially increasing demand for larger, faster and more robust networks
(commonly collectively referred to loosely as "bandwidth"); (c) the
Telecommunications Act of 1996, which sought to open existing proprietary
telecommunications infrastructures to multiple carriers, and, as a consequence,
created a market for new upstart telecommunications carriers (called competitive
local exchange carriers, or CLECs), each of which moved rapidly to deploy its
own network; and (d) an abundance of relatively low cost capital available for
network development and expansion. Together, these factors fueled a rapid and
substantial installation of fiber optic networks in anticipation of rapidly
growing bandwidth demand and future sales. As a result of the demand placed on
our system provider customers by established and
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emerging telecommunications carriers, we faced mounting, unrelenting, demand
during this period for our products. In response, we focused much of our efforts
on growing our business, internally and through acquisitions, to meet the
increasingly urgent needs of our customers for higher performance products,
increased product breadth and expanded manufacturing capacity. As a result of
these efforts, our quarterly sales grew rapidly, for example increasing from $87
million for the quarter ended June 30, 1999 to $925 million for the quarter
ended December 31, 2000.
Since the beginning of calendar 2001, we and our industry have experienced
a dramatic downturn, the primary direct cause of which has been a precipitous
decrease in network deployment and capital spending by the telecommunications
carriers. This decrease can be attributable to, among other things: (a) network
overcapacity, as bandwidth demand, while continuing to grow, did not reach
levels sufficient to match the pace of network deployment; (b) constrained
capital markets; and (c) other factors, including the general inability of the
CLECs to obtain sufficient access to established telecommunications
infrastructures and consolidation among telecommunications carriers. All of the
above factors resulted in a decrease in the overall demand for new fiber optic
networks. In response, the carriers dramatically slowed their purchases of
systems from our customers, who in turned slowed purchases of components and
modules from our competitors and from us. Moreover, as their sales declined, our
customers moved to reduce their component and module inventory levels.
Consequently, the impact of the slowdown on our business is magnified, as we
face declining sales as the result of our customers' declining business and the
resulting adjustment to their inventory levels. Currently, we do not see a
reversal of the industry downturn.
Nevertheless, we believe the industry will ultimately rebound from the
current downturn and grow in the future for several reasons: (a) internet
traffic, an important driver of network expansion, is expected to continue to
grow annually at a rate of between 50 percent and 100 percent, according to
industry research firm Ryan, Hankin & Kent; (b) this internet traffic is likely
to increasingly include content, such as full motion video (including,
ultimately, high definition video) and multichannel high quality audio, the
delivery of which will require as yet unavailable bandwidth; and (c) the
expansion of fiber optic network technology deeper into the networks that serve
both businesses and consumers. Concerning network expansion, fiber optic
networks are currently relegated primarily to long-haul, city-to-city, and
undersea applications, while new markets, in particular the intra-city, or
metro, markets, and, ultimately, neighborhood access, or so-called "fiber to the
curb," remain largely untapped. We believe these untapped markets represent a
significant future opportunity for our industry and for us. Moreover, we
anticipate that installation of metro fiber optic systems and, ultimately, fiber
to the curb, will increase demand for long haul capacity as overall network
traffic expands as users are provided and use greater bandwidth. Consequently,
we anticipate future continued telecommunications network development and
expansion both through the installation of new networks and through the upgrade
and expansion of existing networks. However, given our current lack of
visibility, we cannot provide any assurance as to the timing or extent of any
industry recovery or as to any increase in business or other benefits that we
may receive as a result thereof.
GLOBAL REALIGNMENT PROGRAM
In April 2001 we initiated our Global Realignment Program (the "Program"),
under which we are restructuring our business in response to the current market
environment and as part of our continuing program to integrate our operations.
Specific actions taken under the Global Realignment Program include:
- Reducing our workforce from approximately 29,000 employees to what we
anticipate will be approximately 13,000 employees.
- Eliminating overlapping product development programs and concentrating
our key product development activities in specific global centers, with
the goal to allocate our resources, both geographically and
technologically, to those products and technologies that we believe will
be the most important to our customers.
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- Consolidating our manufacturing, sales and administrative facilities,
through building and site closures, from a total of approximately 6.3
million square feet into approximately 4.4 million square feet. As of
June 30, 2001, nine sites have been closed or scheduled for closure:
Asheville, North Carolina; Bracknell, United Kingdom; Freehold, New
Jersey; Hillend, United Kingdom; Oxford, United Kingdom; Richardson,
Texas; Rochester, New York; Shunde, China and Taipei, Taiwan.
- Integrating our sales force to, among other things, provide each of our
customers with a single point of contact and, in the case of our larger
customers, a dedicated sales team. We have largely completed this task.
This year, we expect to expand our sales restructuring efforts to include
our customer service program by creating technical and support centers to
streamline customer interactions with product line managers. Ultimately,
we intend that every customer have a single point of contact for order
placement, status updates, billing and related questions. We also intend
to exploit our global Oracle systems implementation to consolidate
administrative functions and realize cost savings in all areas of product
sales and support.
The Global Realignment Program is expected to reduce our costs by
approximately $700 million annually after its complete implementation, which is
expected in fiscal 2002. We believe that the measures taken under the Program
will provide us the flexibility to meet our customers' current operating needs
without sacrificing our ability to expand our business and respond to future
increases in business levels.
The Global Realignment Program represents our concerted efforts to respond
to the current demands of our industry. However, these efforts may be
inappropriate or insufficient. The Global Realignment Program may not be
successful in achieving the benefits expected, may be insufficient to align our
operations with customer demand and the changes affecting our industry, or may
be more costly or extensive than currently anticipated.
SPECIAL CHARGES
We recorded significant special charges in the fourth quarter of 2001 of
$264.3 million, $510.6 million, and $59.8 million, related to restructuring
activities, inventory write-downs, and loss on excess inventory purchase
commitments, respectively. Please refer to Management's Discussion and Analysis
of Financial Condition and Results of Operations for further details regarding
the nature of these charges.
The downturn in telecommunications equipment and financial markets has
created unique circumstances with regard to the assessment of certain of our
long-lived assets. In the second half of fiscal 2001, we evaluated the carrying
value of certain long-lived assets and acquired equity investments, consisting
primarily of goodwill and other intangible assets and our investment in ADVA. We
were carrying a large amount of goodwill on our balance sheet. Because of our
significant acquisitions as accounting rules required that goodwill be recorded
based on stock prices at the time merger agreements are executed and announced,
and our merger agreements were negotiated and announced at times when market
valuations were considerably higher than at present.
On April 24, 2001, we announced that we were evaluating the carrying value
of certain long-lived assets and that such evaluation may result in an
approximately $40 billion reduction in goodwill for the quarter ended March 31,
2001. On July 26, 2001, we announced that we were recording reductions of $38.7
billion and $6.1 billion in goodwill and other intangible assets for the
quarters ended March 31, 2001 and June 30, 2001, respectively. In addition, we
announced we were recording a $715 million charge for the quarter ended March
31, 2001 to write down the value of our investment in ADVA. We also announced at
that time that we would be conducting a further assessment of our long-lived
assets and that further adjustments to our fiscal 2001 results may result from
this assessment. We subsequently completed this review and it resulted in our
recording additional charges to reduce goodwill and other long-lived assets of
$1.1 billion and $4.2 billion during the quarters ended March 31, 2001 and June
30, 2001, respectively.
The largest portion of our goodwill arose from the merger of JDS FITEL and
Uniphase and the subsequent acquisitions of SDL, E-TEK, and OCLI. The businesses
associated with these business combinations remain significant operations within
JDS Uniphase notwithstanding the current business downturn and change in market
valuations and each is forecasted to produce positive cash flows over future
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periods. The goodwill resulted from our acquiring strategic companies when
valuations were high. However, while we purchased highly valued shares, we were
also in effect exchanging our highly valued shares at the same time so that none
of the transactions resulting in the creation of large goodwill amounts resulted
from a corresponding outlay of our cash. Had these transactions been done at
different times when valuations were lower with exactly the same share exchange
ratios, the goodwill amounts would have been considerably smaller. However,
waiting for lower valuations may have reduced their strategic value or otherwise
have allowed competitors to buy these companies thereby, eliminating an
opportunity to strengthen JDS Uniphase.
OUR PRODUCTS
Our telecommunications systems customers focus on developing and installing
increasingly flexible, dynamic, efficient and robust high-capacity
communications networks. Our products help meet their needs by enabling higher
capacity through higher transmission speeds and the use of multichannnel signals
(known as wavelength division multiplexing or WDM), amplifying signals further
to reduce or eliminate the need for costly electrical signal regeneration, and
improving reliability and flexibility by offering additional provisioning and
monitoring functionality. Our products include a broad range of components,
modules and subsystems better enabling our customers to satisfy all of their
requirements through "one-stop" shopping at a single supplier. We strive to be
able to supply 100 percent of our customers' component, module and subsystem
needs through our existing, and continually expanding, product portfolio. In
this report, we focus on our more recent product offerings.
We have two principal operating segments through which we develop and
manufacture our telecommunications products: (a) Amplification and Transmission;
and (b) Wavelength Division Multiplexing (WDM), Switching and Thin Film Filters.
AMPLIFICATION AND TRANSMISSION PRODUCTS
Our amplification and transmission products send, receive and amplify
transmission signals in fiber optic systems. Products in this group include, but
are not limited to: (a) products that send signals (source lasers, transmitters,
modulators and wavelength lockers), (b) products that amplify signals
(amplifiers and pump lasers); (c) products that receive signals (photodetectors
and receivers); and (d) integrated products that transmit and detect signals
(transceivers and transponders).
Source Lasers. At the beginning of the network, a source laser powers the
initial signal that will be transmitted over the network. These source lasers
are characterized by their wavelength and power levels. Power, which is measured
in milliwatts, generally determines the ability of the source laser to transmit
over longer distances, with higher power source lasers enabling greater initial
transmission distances. A single source laser is required for each channel in a
WDM system.
Transmitters. We manufacture transmitters that combine source lasers,
modulators, wavelength lockers and electronic drivers so that the signal is
created and encoded in a single package.
Modulators. Modulators turn the source light on and off to encode and send
the information throughout the network. Modulation can be achieved either by
directly turning the laser light source on and off or externally by transmitting
or alternating a continuous source laser signal to achieve the same on and off
effect. Lower performance, shorter distance network systems are better suited
for direct modulation, while other systems are designed to utilize external
modulators to encode the information signal. We produce both direct and external
modulators used in fiberoptic telecommunications systems.
Wavelength Lockers. We supply wavelength lockers that are used to
stabilize the wavelength of lasers used in dense WDM transmission systems. These
lockers ensure that, over the lifetime of the system, the wavelength of a source
laser does not drift to interfere with an adjacent wavelength channel. The
locker operates by filtering and detecting a small amount of the source-laser
light and providing a stabilizing feedback signal to the laser.
Amplifiers. We supply both Erbium-doped fiber amplifier ("EDFA") optical
amplifiers and Raman amplification pumps. These products are designed to boost
the WDM optical signals without reconversion to
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electrical signal and permit an optical signal to travel a greater distance
between electronic terminals and regenerators. These modules include multiple
passive and active components such as couplers, isolators, pump combiners and
pump lasers.
Pump Lasers. Pump lasers are used in optical amplifiers within networks to
regenerate the light signal that naturally suffers loss over distance within the
network. The advent of the optical amplifier in the early 1990s has permitted
the development of today's advanced fiberoptic networks by eliminating the need
within those networks to convert attenuated optical signals back into the
electrical domain to amplify these signals for continued transmission over long
distances. Optical amplifiers each contain from one to six pump lasers depending
on amplifier performance requirements. We supply 980-nanometer and
1480-nanometer pump lasers that are used in optical amplifiers. These pumps are
used to energize the erbium-doped fiber that comprises the amplifier. We also
supply 14xx-nanometer pump lasers that are utilized in Raman modules to create
gain in the transmission fiber, allowing the signal to travel farther without
electrical regeneration.
Photodetectors and Receivers. Receivers and photodetectors detect the
optical signals and convert them back into electronic signals. We supply optical
photodetectors and receivers for fiberoptic telecommunications and cable
television networks. Receivers are used in WDM products for each channel at both
sides of the fiberoptic link as wavelength translation is required.
Photodetectors are used throughout a network to monitor a variety of statistics
including power levels and channel count.
Transceivers. In addition to transmitters we also offer transceivers that
combine transmitters with receivers so that signals can be generated and encoded
or received and detected in a single package. These modules would be installed
at the beginning and end of a system.
Cable Television Transmitters and Amplifiers. In cable television networks
we supply externally modulated transmitters for trunk-line applications,
directly modulated transmitters for the distribution portion of cable television
networks, return-path lasers for interactive communications and transmitters
providing both analog and digital signals to the recipient.
Telecommunications Specialty Modules and Instruments. We supply a number
of specialty products for multi-gigabit fiberoptics systems. In particular, we
provide some of the transmit/receive instrumentation modules used to design and
test such systems. We also provide a variety of variable-bit rate receivers and
OC-48 transmit/receive products that operate over extended temperature ranges.
We believe our customers are seeking greater integration and functionality
from their component vendors. By reducing the number of component integration
and manufacturing steps at the customer level, our customers can better focus
their time and resources on their core competencies of system architecture,
software design and related competitive advantages. Furthermore, we believe that
greater integration of components into single-box modules and subsystems will
reduce overall system costs. Consistent with this belief, in 2001 our new
product offerings in the Amplification and Transmission Products Group focused
on module level solutions, under which various individual components are
combined to provide increased functionality and standardization in a smaller
package. For example our transceiver modules generally combine a transmitter,
modulator, wavelength locker, photodetector and control electronics into a
single package. Examples of new 2001 products include:
- 10 Gb/s (OC-192) and 2.5 Gb/s (OC-48) MSA Transceivers/Transponders for
Extended, Long and Short Reach that feature integrated optical and
electronic components for transmitting and receiving optical signals.
- 10 Gb/s APD/PIN Receiver with automatic gain control (AGC) that improves
signal reception in OC-192 systems.
- C, L or C plus L Raman Amplification Pump that enables the transmission
fiber to serve as a medium for providing signal gain.
- High Power 360 mW 980nm Grating-Stabilized Pump Modules that are the
next-generation high power pumps for EDFA designs.
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- C-Band Cooled Micro-Amplifier that provides simple optical amplification
in a compact size, and is designed both for DWDM systems at points where
signals are not multiplexed and for deployment in edge or access
networks.
- Uncooled 980 nm pump laser that for EDFAs offers the highest power in the
industry (up to 200 mW), eliminates the need for additional components
and electronics for temperature control, and uses only a fraction of the
operating power required by standard, cooled pump lasers.
- 40 Gb/s Small Signal Amplifier Driver that provides optical-to-electrical
conversion at the point where the signal is received.
WDM, SWITCHING AND THIN FILM FILTER PRODUCTS
Our WDM, switching and thin film products guide and route light signals
through a fiber optic network. These products include, but are not limited to:
add-drop multiplexers, isolators, thin film-based wavelength division
multiplexers, arrayed waveguides, fiber Bragg gratings, couplers, circulators,
optical switches, micro-electro-mechanical systems, gain flattening filters,
attenuators, and test instruments for optical components. Our non-telecom
products are also included in this segment.
Add-Drop Multiplexers. We supply add-drop multiplexers that allow systems
to add and drop optical signals without reconversion to an electrical signal.
For example, a system operating from San Francisco to New York can drop one
signal in Chicago and add another allowing for greater network flexibility. The
modules include multiple components such as switches, fiber Bragg gratings and
attenuators.
Couplers, Filters, Isolators and Circulators. Wavelength division
multiplexer couplers are used to split and combine signals in an optical
network. We supply WDM demultiplexers and access/bi-directional couplers. Many
of these products are based on thin-film filters, arrayed waveguide gratings,
fused fiber couplers, microlenses and/or special optical materials. The WDM
products are used after the source lasers and before the receivers.
Isolator products are used to cause light signals in a network to propagate
in one direction within a network, but prevent that signal from returning in the
opposite direction. Circulators are similar to isolators in causing light in a
system to flow in only one direction, but are different in that circulators
incorporate multiple ports and use these multiple ports to perform a routing
function within the network. We supply various types of isolators, circulators
and we also produce tunable narrow-bandpass filters that are wavelength-tunable
by voltage control.
Fiber Bragg Gratings. We supply fiber Bragg gratings to separate and
filter multiple wavelengths of light propagating in the same fiber. These
gratings are generally used in signal monitoring, dispersion compensation and
gain flattening applications.
Switches and Attenuators. Optical switches are used to route and switch
signals to different destinations within networks. Attenuators are used to
adjust the power of the optical signal to be compatible with the optical
receivers within a network system.
Consistent with our belief that our customers are seeking greater
integration and functionality in products provided by their component vendors,
our new product offerings in the WDM, Switching and Thin Film Group focused on
module level solutions in year 2001. Examples of new products include:
- Tunable Dispersion Compensator is the first available product for
per-channel, adjustable dispersion compensation for 40 Gb/s and 10 Gb/s
ultra long-haul systems. Different colors of light travel along an
optical fiber at slightly different speeds, and light signals that carry
information always have some small variation in the color of the light.
The dispersion compensation modules cancel out those differences in speed
so that all the colors of the light signal arrive at their destination at
the same time.
- 50 and 100 GHz, 8 and 40 Channel V-MUX Integrated VOA Array/WDM
Multiplexer that incorporates arrayed waveguide gratings for dense
wavelength division multiplexing with temperature
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control and variable optical attenuators. Attenuators adjust the strength
of the optical signals to make them equal so that they can be received
cleanly.
- MEMS Variable Optical Attenuator (VOA) is JDS Uniphase's first product
based on Micro-Electro-Mechanical Systems (MEMS) technology and offers
high performance and fast response in an ultra-compact package. The MEMS
VOA is well suited to equalize the strength of multiple optical signals
and provide network power provisioning in optical amplifiers giving
network designers more flexibility in managing bandwidth.
- MOMS Series 1x2 Optical Switches, based on Micro-Opto-Mechanical Systems
(MOMS) technology, these switches feature improved fiber management
provided in an extremely small, compact package.
- MEMS 1x2 and 2x2 Optical Switches that use MEMS technology to provide
advanced switching speeds and improved optical performance bundled in a
condensed, hermetically sealed package.
- VCF Series of 100 GHz tunable filters that offer attractive solutions for
selecting specific wavelengths to be dropped to metropolitan rings or for
provisioning single wavelengths to end users as they grow.
- Network Monitoring Module is an eight-channel power monitoring device
that provides a digital output of channel power and a control output for
power balancing, which helps identify any potential network problems and
directs data flow accordingly to allow optimal network reliability.
- Wavelength Monitoring Unit that measures optical power, optical
signal-to-noise ratio (OSNR), and wavelength.
- Optical Performance Monitor that has the highest accuracy for OSNR and
also measures optical power and wavelength.
TEST INSTRUMENTS
Test instruments are used for testing and measuring optical components.
Many of the test instruments were originally developed for evaluating our own
optical components during design and production. In 2001, JDS Uniphase
introduced our Multiple Application Platform (MAP), the next generation platform
for its line of fiber optic test and measurement instrumentation. MAP provides a
wide range of test and measurement switches and attenuators in a modular and
upgradeable architecture suitable for R&D and manufacturing environments.
NON-TELECOM PRODUCTS
In addition to our core optical components and modules business, we also
manufacture and supply laser subsystems for a broad range of applications,
optical display and projection products used in computer displays and other
similar applications and light interference pigments used in security products
and decorative surface treatments.
Our principal laser subsystem products consist of air-cooled argon gas
laser subsystems, which generally emit blue or green light, helium-neon lasers,
which generally emit red or green light, and solid state lasers, which generally
emit infrared, blue or green light. These systems consist of a combination of a
laser head containing the lasing medium, power supply, cabling and packaging,
including heat dissipation elements.
Optical display and projection products control the brightness, contrast
and resolution of next generation display products including computer displays,
digital image projectors, flat panel displays, scanners and personal digital
assistants (commonly known as PDAs).
Light interference pigments achieve unique color shifting characteristics
in security products and decorative surface treatments. Security related
products include bank notes, passports, credit cards, tax stamps and brand
protection labels. Decorative surface treatments include automotive paint,
cosmetics, electronic cases and apparel.
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COMPETITIVE ENVIRONMENT
We compete with numerous fiber optic component manufacturers, including
independent merchant suppliers and business units within vertically integrated
equipment manufacturers, including some of our customers. While each of our
product families has multiple competitors, we believe that we have the broadest
range of fiber optic components and modules available from one supplier in the
industry. We also believe that this range of products will position us well in
the industry as it continues to move towards module and subsystem level products
as we can better control the cost and quality of the components contained in
module and subsystem level products.
While not a comprehensive list, our competitors in one or more product
lines include: Agere, Agilent, Alcatel Optronics, Avanex, Chorum, Ciena,
Corning, DiCon, Exfo, Fujitsu, Furukawa, Hitachi, New Focus, Nortel HPOCS,
Oplink, Sumitomo, Tellium, and Tyco.
To save on costs and time, we believe that telecommunications system
suppliers generally seek fewer vendors for a greater variety of components and
integrated modules. A single vendor of multiple components or modules has the
ability to design these products to interact more effectively within a network
infrastructure and to optimize performance between them when installed in a
single network system. Given these factors, we believe that established system
suppliers will seek to reduce the level of their vertical integration at the
component and module level and to focus on the overall system design and
architecture of their products, which has historically been the primary means by
which those system suppliers have differentiated themselves from their
competitors. In this environment, we will continue to focus on selling customers
a portfolio of products that meets their system and cost requirements while
ensuring us a substantial portion of their component and module needs for the
particular system. Moreover, in the current industry uncertainty, we believe
that the communications equipment manufacturers will seek to further consolidate
their vendor relationships, strengthening ties with established industry
leaders, like us, and eliminate or reduce their dependence on smaller and less
secure suppliers. We believe our broad product portfolio, financial stability,
strongly funded research and development, and high qualification standards,
position us increasingly to compete to be the supplier of choice to these
companies now and in the future.
COMPANY STRATEGY
Our mission has been and continues to be to maintain and expand our
position as the leading merchant supplier of advanced components, modules and
subsystems to the telecommunications and cable television networking
marketplace. The key elements of our business strategy are as follows:
- Maintain Close Customer Relationships. We work closely with our
customers from initial product design through to manufacturing and
delivery. We strive to engage with our customers at the early stages of
system development to provide them with all of their component and module
needs through customized design and manufacturing, aligned with the
requirements of their systems. Maintaining and strengthening these
relationships is particularly critical during the current industry
downturn. Accordingly, reorganizing and focusing our sales, customer
support and product development efforts to strengthen and streamline our
customer relationships is a fundamental aspect of our Global Realignment
Program.
- Maintain Technology Leadership and High Product Reliability. We consider
our technology and product leadership to be critical to our continued
success. We offer the broadest range of components and modules to
telecommunications system providers, and we expect to continue this
leadership. To do so, we must continue to develop new products, offering
increased efficiency, performance and functionality, and with higher
levels of integration, to our customers. To this end, notwithstanding the
current economic downturn, we allocate, and expect to continue to
allocate, significant funding and management emphasis to our product and
technology development programs. Moreover, by eliminating overlapping R&D
programs and concentrating our key product development activities in
specific global centers, under our Global Realignment Program, we expect
to conduct these programs with greater efficiency and focus. We believe
that focused, judicious, and vigorous product development
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programs are critical to maintaining and strengthening our leadership in
current and future industry climates.
- Offer a Comprehensive Portfolio of Fiber Optic Components and
Modules. We endeavor to be the preferred, comprehensive, source for an
increasingly greater variety of optical components and modules, for both
the established network system providers as well as the emerging system
providers. We believe our customers will continue to reduce the number of
suppliers of components and modules for their systems. We believe this
trend will accelerate because of the current economic downturn and the
need for our customers to build relationships with financially secure,
comprehensive solution providers. Accordingly, we strive to provide a
comprehensive solution to our customers' component and module needs.
- Develop Modules and Subsystems. Our customers continue to seek an
increase in the level of integration in the optoelectronic and optical
products they purchase from their suppliers. Moreover, we believe our
customers' ability to offer robust, dynamic high bandwidth systems to
their carrier customers on a cost-effective basis will be integral to an
industry recovery. We believe that greater integration of components into
single-box modules and subsystems will reduce overall system costs.
Furthermore, we believe reductions in the number of component integration
and manufacturing steps required to be performed by our customers enable
our customers to better focus their resources on aspects of their
business that build on their core system architecture and maintenance
competencies and related competitive advantages over other system
providers. To this end, we expect to continue to devote substantial
resources and effort to develop and manufacture increasingly integrated
module and subsystem-level solutions for our customers. We believe that
our broad core competencies in optical components, together with our
strong customer relationships, will enable us to successfully develop and
manufacture products offering these levels of integration and
functionality to our customers.
- Structure Our Manufacturing Capabilities for Maximum Efficiency and
Quality. Prior to the current industry downturn, in response to
increasing customer demand, we expanded our worldwide manufacturing
capacity through a number of initiatives, including facility expansion,
mergers and acquisitions, enhanced manufacturing efficiencies and yield
improvements, automation, and outsourcing. In the current economic
environment, we realize the need to shift our manufacturing focus from
capacity expansion to efficiency, while continuing to maintain product
quality and the ability to expand during any future business upturn.
Consequently, a critical goal of our Global Realignment Program is to
reorganize and consolidate our manufacturing operations into those
facilities best suited economically, technologically and geographically,
to manufacture our products while consistently meeting our and our
customers' quality standards. When completed, we expect production to be
centralized in designated competency centers in order to enhance
productivity and streamline operations. In connection with the Global
Realignment Program, we are moving the manufacturing of many of our
established products to our facility in Shenzen, Peoples Republic of
China. In addition to our efforts under the Global Realignment Program,
we continue our efforts to increase manufacturing efficiency through
automation and outsourcing, where partners may help remove production
bottlenecks and create a more cost-effective and scalable process.
- Seek Complementary Mergers and Acquisitions. The telecommunications
industry is experiencing rapid consolidation and realignment because of
globalization, deregulation and rapidly changing competitive technologies
such as fiber optics for cable television, wireless communications and
the Internet. We expect this consolidation and realignment trend to
increase as the result of the current industry downturn. We have grown in
part by acquiring or merging with telecommunications component and module
businesses and may continue to do so in the future. We frequently
evaluate strategic opportunities and intend in the future to pursue
acquisitions of additional products, technologies and businesses
actively.
Although we expect to be successful in implementing our strategy, our
statements about our strategy are necessarily forward looking. We cannot predict
the future and many factors, some within and some outside of
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our control, may cause us to fail to achieve one or more of our strategic goals.
Some of these factors are discussed under "Risk Factors" below.
SALES AND MARKETING
We market our telecommunications components to our customers primarily
through our direct sales force in North America, Asia, Europe and Australia. In
addition, we currently sell some of our products through distributors and
manufacturers' representatives in North America, Europe, Asia, South America,
the Middle East and Australia. Selected customers for telecommunications
components include:
<Table>
Alcatel Corvis Nortel
Agilent Juniper Networks ONI Systems
Ciena Lucent Siemens
Cisco Marconi Sycamore
Corning Motorola Tyco
</Table>
Subsequent to our acquisition of SDL and continuing with our Global
Realignment Program, we are integrating our sales force to, among other things,
provide each of our customers with a single point of contact, who is or will be
the dedicated account specialist for that customer. In addition, each of our
larger customers has or will have a dedicated sales team. We have largely
completed this task. Ultimately, it is our intention that every customer has a
single point of contact for order placement, status updates, billing and related
questions.
We market our non-telecommunication products through our specialized
non-telecommunications direct sales force and worldwide network of
representatives and distributors.
CUSTOMER SUPPORT AND SERVICE
We believe that a high level of customer support is necessary to
successfully develop and maintain long-term relationships with all of our
customers. With respect to our core telecommunications businesses, each
relationship begins at the design-in phase and is maintained as customer needs
change and evolve. We provide direct service and support to our
telecommunications customers through our offices in North America, Asia and
Europe. This year we expect to establish technical and support centers to
streamline customer interactions with product line managers. We also intend that
our customer service unit exploit our global Oracle implementation to
consolidate administrative functions and realize cost savings.
RESEARCH AND DEVELOPMENT
During 2001, 2000 and 1999, we incurred research and development
expenditures of $325.9 million, $113.4 million and $27.0 million, respectively.
We are currently developing new and enhanced telecommunications components,
modules and subsystems. Once the design of a product is complete, our
engineering efforts shift to enhance both the performance of that product and
our ability to manufacture it at higher volumes and at lower cost. For the
telecommunications marketplace, we are directing research and development to
strategically important areas: tunable compensation, wavelength switching, and
next-generation amplification and transponder products. We continue to develop
packaging technology for a number of our optoelectronic components so as to
enable us to supply more integrated and lower cost packaged modules to our
customers.
In response to the recent economic downturn, we are cutting the dollar
amount of our research and development expenditures for 2002. However, we expect
such expenditures will increase as a percentage of net sales during the same
period. In addition, as part of our Global Realignment Program, we are
eliminating overlapping product development programs and concentrating our key
product development activities in specific global centers. The goal is to
allocate our resources both geographically and technologically to products and
technologies that we believe will be most important to our customers.
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MANUFACTURING
The following table sets forth our main manufacturing locations and the
primary products manufactured at each location as at June 30, 2001 (except as
indicated):
<Table>
<Caption>
LOCATION PRODUCTS
-------- --------
NORTH AMERICA
Canada, British Columbia, Victoria*....... 980-nm and 14xx-nm terrestrial pump packaging
Canada, Ontario, Ottawa................... Optical amplifiers, wavelength division multiplexers,
couplers, circulators, switches, tunable filters, EDFAs,
isolators and test instruments for telecommunications,
waveguides and attenuators
Canada, Ontario, Toronto.................. Optical performance monitors and dispersion compensation
modules
USA, California, Manteca.................. Laser subsystems
USA, California, San Jose................. Add-drop multiplexer modules, wavelength division
multiplexers, Raman amplifiers, 980-nm pump lasers,
couplers, circulators, switches, isolators, optical
amplifiers and laser subsystems
USA, California, Santa Rosa............... Thin film filters, optical display and projection
products and light interference pigments
USA, Connecticut, Bloomfield.............. Lithium niobate modulators and wavelength lockers
USA, Florida, Melbourne................... Transponder modules (OC-48 and OC-768) and automation
equipment
USA, Massachusetts, Norwood............... Specialty fiber
USA, New Jersey, Eatontown................ EDFA optical amplifiers
USA, New Jersey, Piscataway............... Electronic drivers for telecommunications
USA, New Jersey, Trenton.................. Optical photodetectors and receivers
USA, New York, Rochester*................. Display optics
USA, North Carolina, Raleigh-Durham....... Micro-electro-mechanical-systems
USA, Ohio, Columbus....................... Arrayed waveguide grating
USA, Pennsylvania, Horsham................ Transponder modules (OC-192)
USA, Texas, Richardson*................... Optical performance monitors
EUROPE
Germany, Waghaeusel-Kirrlach.............. Waveguide splitters and splitter shelves
Netherlands, Eindhoven.................... Source lasers, semiconductor amplifiers, and
semiconductor optical amplifiers
Switzerland, Zurich**..................... 980-nm pump lasers
United Kingdom, Bracknell*................ Optical performance monitors
United Kingdom, Hillend*.................. Thin film filters
United Kingdom, Oxford*................... Optical subassemblies
United Kingdom, Plymouth*................. Advanced laser packaging
United Kingdom, Torquay................... Fused fiber components
United Kingdom, Witham*................... Integrated RZ and OC-768 modulators
REST OF WORLD
Australia, Sydney......................... Fiber Bragg gratings
China, Fuzhou............................. YVO4 and lithium niobate crystals
China, Shenzhen........................... Isolators and wavelength division multiplexers
China, Shunde*............................ Isolators and wavelength division multiplexers
Taiwan, Taipei*........................... Couplers and isolators
</Table>
---------------
* These facilities have currently been identified for closure in 2002 under the
Global Realignment Program.
** The Zurich facility was sold to Nortel Networks on February 13, 2001.
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SOURCES AND AVAILABILITY OF RAW MATERIALS
Our policy is to establish at least two sources of supply for materials
whenever possible, although we do have some sole source supply arrangements. The
loss or interruption of such arrangements could have an impact on our ability to
deliver certain products on a timely basis.
PATENTS AND PROPRIETARY RIGHTS
Intellectual property rights that apply to our various products include
patents, trade secrets and trademarks. Because of the rapidly changing
technology and a broad distribution of patents in the optoelectronics industry,
our intention is not to rely primarily on intellectual property rights to
protect or establish our market position. We do not intend to broadly license
our intellectual property rights unless we can obtain adequate consideration or
enter into acceptable patent cross-license agreements. We held over 600 U.S.
patents and numerous foreign patents at June 30, 2001.
MINORITY INVESTMENTS
We make minority investments in companies that build technology or provide
services that are complementary to our products. By investing in new ventures,
we strengthen our partnerships with such companies. Together with our partners,
we believe we can offer more complete solutions to the market.
BACKLOG
Backlog consists of written purchase orders for products for which we have
assigned shipment dates within the following 12 months. As of June 30, 2001, our
backlog was $677 million as compared to a backlog of $931 million at June 30,
2000. Orders in backlog are firm, but are subject to cancellation or
rescheduling by the customer. Because of possible changes in product delivery
schedules and cancellation of product orders and because our sales will often
reflect orders shipped in the same quarter in which they are received, our
backlog at any particular date is not necessarily indicative of actual sales for
any succeeding period. Certain of our customers have adopted "just in time"
techniques with respect to ordering the our products, which will cause us to
have shorter lead times for providing products to some customers. Such shorter
lead times are likely to result in lower backlog relative to sales in future
periods.
As a consequence of the industry downturn subsequent to June 30, 2001, we
experienced cancellations of some orders included in our June 30, 2001 backlog.
Moreover, we expect our backlog for future periods to be lower than at June 30,
2001. For these reasons, our ability to translate our current backlog (including
the $677 million of backlog at June 30, 2001) into sales has been and is likely
to continue to be adversely affected by order cancellation and rescheduling,
which were significant in recent quarters. Consequently, during this period of
industry uncertainty, we caution that, our announced backlog may not be a
reliable indicator of future sales or the level of future orders.
EMPLOYEES
At June 30, 2001, we had a total of 19,948 full-time employees worldwide,
including 2,350 in research, development and engineering, 622 in sales,
marketing and service, 14,979 in manufacturing, and 1,997 in general management,
administration and finance. On July 26, 2001, we announced our intention to
reduce our global work force to approximately 13,000 employees through the
Global Realignment Program. As of June 30, 2001, approximately 6,100 employees
had been terminated as part of the Program. Of the total work force reduction,
the majority was in manufacturing.
Our employees are not represented by any collective bargaining organization
except for our Netherlands and Germany operations. We have never experienced a
work stoppage, slowdown or strike. Notwithstanding the current downturn, we
consider our employee relations to be generally good.
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RISK FACTORS
OUR OPERATING RESULTS AND STOCK PRICE FLUCTUATE SUBSTANTIALLY
Operating results for future periods are never perfectly predictable even
in the most certain of economic times, and we expect to continue to experience
fluctuations in our quarterly results and in our guidance, when provided, for
financial performance in future periods. These fluctuations, which in the future
may be significant, could cause substantial variability in the market price of
our stock. In addition to those concerns discussed below, all of the concerns we
have discussed under "Risk Factors" could affect our operating results from time
to time.
Our Operating Results and Stock Price Are Affected by Fluctuations in Our
Customers' Businesses
Our business is dependent upon product sales to telecommunications network
system providers, who in turn are dependent for their business upon orders for
fiber optic systems from telecommunications carriers. Any downturn in the
business of any of these parties affects us. Moreover, our sales often reflect
orders shipped in the same quarter in which they are received, which makes our
sales vulnerable to short-term fluctuations in customer demand and difficult to
predict. In general, customer orders may be cancelled, modified or rescheduled
after receipt. Consequently, the timing of these orders and any subsequent
cancellation, modification or rescheduling of these orders have affected and
will in the future affect our results of operations from quarter to quarter.
Also, as our customers typically order in large quantities, any subsequent
cancellation, modification or rescheduling of an individual order may alone
affect our results of operations.
We Are Experiencing Decreased Sales and Increased Difficulty in Predicting
Future Operating Results
As the result of currently unfavorable economic and market conditions, (a)
our sales are declining, (b) we are unable to predict future sales accurately,
and (c) we are currently unable to provide guidance for future financial
performance. The conditions contributing to this difficulty include:
- uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon whom our customers and, ultimately we,
depend for sales;
- the telecommunications carriers' current limited access to the capital
required for expansion;
- our customers decreasing inventory levels, which, in turn, reduces our
sales;
- lower near term sales visibility; and
- general market and economic uncertainty.
Based on these and other factors, many of our major customers have reduced,
modified, cancelled or rescheduled orders for our products and have expressed
uncertainty as to their future requirements. As a result, we currently
anticipate that our net sales in future periods may decline. In addition, our
ability to meet financial expectations for future periods may be harmed.
We Have Incurred, and May in the Future Incur, Inventory-Related Charges, the
Amounts of Which Are Difficult to Predict Accurately
As a result of the business downturn we have incurred charges to align our
inventory with actual customer requirements over the near term. We use a rolling
six-month forecast based on anticipated product orders, product order history,
forecasts, and backlog to assess our inventory requirements. As discussed above,
our ability to forecast our customers' needs for our products in the current
economic environment is very limited. We have incurred, and may in the future
incur, significant inventory-related charges. In the fourth quarter of 2001, we
incurred charges related to inventory write-downs and losses on excess inventory
purchase commitments of $510.6 million, and $59.8 million, respectively. We may
incur significant similar charges in future periods. Moreover, because of our
current difficulty in forecasting sales, we may in the future revise our
previous forecasts. While we believe, based on current information, that the
inventory-related charges
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recorded in 2001, are appropriate, subsequent changes to our forecast may
indicate that these charges were insufficient or even excessive.
As a result of these and other factors, our stock price has declined
substantially over the past year. Despite this decline, the market price of our
stock and the stocks of many of the other companies in the optical components,
modules and systems industries continue to trade at high multiples of earnings.
An outgrowth of these multiples and market volatility is the significant
vulnerability of our stock price and the stock prices of our customers and
competitors to any actual or perceived fluctuation in the strength of the
markets we serve, no matter how minor in actual or perceived consequence.
Consequently, these multiples and, hence, market prices may not be sustainable.
These broad market and industry factors have caused and may in the future cause
the market price of our stock to decline, regardless of our actual operating
performance or the operating performance of our customers.
IF WE FAIL TO MANAGE OR ANTICIPATE OUR FUTURE GROWTH, OUR BUSINESS WILL SUFFER
The optical networking business has historically grown, at times rapidly,
and we have grown accordingly. We have made and, although we are currently in an
industry downturn, expect to continue to make significant investments to enable
our future growth through, among other things, internal expansion programs,
internal product development and acquisitions and other strategic relationships.
If we fail to effectively manage or anticipate our future growth effectively,
particularly during periods of industry decline, such as these, our business
will suffer.
Difficulties Associated With Integrating Our Acquired Businesses Could Harm
Our Overall Business Operations
Our growth strategy includes acquisitions of other companies, technologies
and product lines to complement our internally developed products. In fact, we
are the product of several substantial acquisitions, including, among others,
JDS FITEL on June 30, 1999, OCLI on February 4, 2000, E-TEK on June 30, 2000 and
SDL on February 13, 2001. We expect to continue this strategy. Critical to the
success of this strategy and, ultimately, our business as a whole, is the
ordered, efficient integration of acquired businesses into our organization. If
our integration efforts are unsuccessful, our businesses will suffer. Successful
integration depends upon:
- our ability to integrate the manufacture, sale and marketing of the
products of the businesses acquired with our existing products;
- our ability to complete product development programs and consolidate
research and development efforts;
- our ability to retain key personnel of the acquired business and
effectively organize the acquired business' personnel with our own;
- our ability to consolidate and reorganize operations with those of the
acquired business; and
- our ability to expand our information technology systems (including
accounting and financial systems, management controls and procedures).
Our integration efforts, which are ongoing, may not be successful and may result
in unanticipated operations problems, expenses and liabilities and the diversion
of management attention.
Our Acquisition Strategy is Costly
Our acquisition strategy is costly. For example, we have incurred direct
costs associated with the combination of Uniphase and JDS FITEL of $12.0
million, incurred $8.2 million associated with the acquisition of OCLI, incurred
$32.3 million associated with the acquisition of E-TEK and incurred $44.6
associated with the acquisition of SDL. In addition, we paid certain SDL
executives $300.9 million in consideration of their agreement to amend their
change of control agreements and enter into non-compete agreements with us. We
may incur additional material charges in subsequent quarters to reflect
additional
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costs associated with these and other combinations and acquisitions, which will
be expensed as incurred. Moreover, to the extent an acquired business does not
perform as expected, we have and may continue to incur substantial additional
unforeseen costs to develop, restructure or dispose of such business.
Nonperforming or underperforming acquired businesses may also divert management
attention, dilute the value of our common stock and exchangeable shares and
weaken our financial condition.
Our Global Realignment Program May Not Be Successful
As part of our continuing integration efforts and in response to the
current economic slowdown, we recently commenced a Global Realignment Program,
under which we are, among other things:
- consolidating our product development programs and eliminating
overlapping programs,
- consolidating our manufacturing of several products from multiple sites
into specific locations around the world, and
- realigning our sales organization to offer customers a single point of
contact within the company, and creating regional and technical centers
to streamline customer interactions with product line managers.
Implementation of the Global Realignment Program involves reductions in our
workforce and facilities and, in certain instances, the relocation of products,
technologies and personnel. We will incur significant expenses to implement the
program and we expect to realize significant future cost savings as a result. As
with our other integration efforts, the Global Realignment Program may not be
successful in achieving the expected benefits within the expected timeframes,
may be insufficient to align our operations with customer demand and the changes
affecting our industry, may disrupt our operations, or may be more costly than
currently anticipated.
If We Fail to Commercialize New Product Lines Our Business Will Suffer
We intend to continue to develop new product lines and to improve existing
product lines to meet our customers' diverse and changing needs. However, our
development of new products and improvements to existing products may not be
successful, as:
- we may fail to complete the development of a new product or product
improvement; or
- our customers may not purchase the new product or improved product
because, among other things, the product is too expensive, is defective
in design, manufacture or performance, or is uncompetitive, or because
the product has been superceded by another product or technology.
Nonetheless, if we fail to successfully develop and introduce new products and
improvements to existing products, our business will suffer.
Furthermore, new products require increased sales and marketing, customer
support and administrative functions to support anticipated increased levels of
operations. We may not be successful in creating this infrastructure nor may we
realize any increased sales and operations to offset the additional expenses
resulting from this increased infrastructure. In connection with our recent
acquisitions, we have incurred expenses in anticipation of developing and
selling new products. Our operations may not achieve levels sufficient to
justify the increased expense levels associated with these new businesses.
Any Failure of Our Information Technology Infrastructure Could Harm Our
Business
We rely upon the capacity, reliability and security of our information
technology hardware and software infrastructure and our ability to expand and
update this infrastructure in response to our growth and changing needs. In
connection with our growth, we are constantly updating our current information
technology infrastructure and expect to incur significant costs and expend
significant management and other resources relating to our upgrade efforts.
Among other things, we are currently unifying our manufacturing, accounting,
sales and human resource data systems using an Oracle platform and expanding and
upgrading our networks
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and integrating our voice communications systems. Any failure to manage, expand
and update our information technology infrastructure could hurt our business.
WE HAVE MANUFACTURING AND PRODUCT QUALITY CONCERNS
If We Do Not Achieve Acceptable Manufacturing Volumes, Yields and Costs, Our
Business Will Suffer
Our success depends upon our ability to timely deliver products to our
customers at acceptable volume and cost levels. The manufacture of our products
involves highly complex and precise processes, requiring production in highly
controlled and clean environments. Changes in our manufacturing processes or
those of our suppliers, or their inadvertent use of defective or contaminated
materials, could significantly hurt our ability to meet our customers' product
volume and quality needs. Moreover, in some cases, existing manufacturing
techniques, which involve substantial manual labor, may not achieve the volume
or cost targets of our customers. In these cases, we will need to develop new
manufacturing processes and techniques, which are anticipated to involve higher
levels of automation, to achieve these targets, and we will need to undertake
other efforts to reduce manufacturing costs. Currently, we are devoting
significant funds and other resources to (a) the development of advanced
manufacturing techniques to improve product volumes and yields and reduce costs,
and (b) realign some of our product manufacturing to locations offering optimal
labor costs. These efforts may not be successful. If we fail to achieve
acceptable manufacturing yields, volumes and costs, our business will be harmed.
If Our Customers Do Not Qualify Our Manufacturing Lines for Volume Shipments,
Our Operating Results Could Suffer
Customers will not purchase any of our products, other than limited numbers
of evaluation units, prior to qualification of the manufacturing line for the
product. Each new manufacturing line must go through varying levels of
qualification with our customers. Moreover, under our Global Realignment Program
we are consolidating our worldwide manufacturing operations. Among other things,
we will be moving the manufacturing of some of our products to other facilities.
The manufacturing lines for these products at the consolidated facilities must
undergo qualification with our customers before commercial manufacture of these
products can recommence. The qualification process, whether for new products or
in connection with the relocation of manufacturing of current products,
determines whether the manufacturing line achieves the customers' quality,
performance and reliability standards. Delays in qualification can cause a
product to be dropped from a long-term supply program and result in significant
lost sales opportunities over the term of that program. We may experience delays
in obtaining customer qualification of our manufacturing lines and, as a
consequence, our operating results and customer relationships would be harmed.
If Our Products Fail to Perform, Our Business Will Suffer
Our business depends on our producing excellent products of consistently
high quality. To this end, our products are rigorously tested for quality both
by us and our customers. Nevertheless, our products are highly complex and our
customers testing procedures are limited to evaluating our products under likely
and foreseeable failure scenarios. For various reasons (including, among others,
the occurrence of performance problems unforeseeable in testing), our products
may fail to perform as expected. Failures could result from faulty design or
problems in manufacturing. In either case, we could incur significant costs to
repair and/or replace defective products under warranty, particularly when such
failures occur in installed systems. We have experienced such failures in the
past and remain exposed to such failures, as our products are widely deployed
throughout the world in multiple demanding environments and applications. In
some cases, product redesigns or additional capital equipment may be required to
correct a defect. In addition, any significant or systemic product failure could
result in lost future sales of the affected product and other products, as well
as customer relations problems.
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ACCOUNTING TREATMENT OF OUR ACQUISITIONS HAS IMPACTED OUR OPERATING RESULTS
Our Operating Results Are Adversely Impacted by Purchase Accounting Treatment,
Primarily Due to the Impact of Amortization of and Other Reductions in the
Carrying Value of Goodwill and Other Intangibles Originating From Acquisitions
Under accounting principles generally accepted in the United States through
June 30, 2001, we accounted for most of our acquisitions using the purchase
method of accounting. Under purchase accounting, we recorded the market value of
our common shares and the exchangeable shares of our subsidiary, JDS Uniphase
Canada Ltd., issued in connection with acquisitions and the fair value of the
stock options assumed and the amount of direct transaction costs as the cost of
acquiring these entities. That cost is allocated to the individual assets
acquired and liabilities assumed, including various identifiable intangible
assets such as in-process research and development, acquired technology,
acquired trademarks and trade names and acquired workforce, based on their
respective fair values. We allocated the excess of the purchase cost over the
fair value of the net identifiable assets to goodwill.
The impact of purchase accounting on our operating results is significant.
For fiscal 2001, we recorded an acquisition related amortization expense of
$5,387.0 million.
Additionally, we also incur other purchase accounting related costs and
expenses in the period a particular transaction closes to reflect purchase
accounting adjustments adversely affecting gross profit and the costs of
integrating new businesses or curtailing overlapping operations. Purchase
accounting treatment of our mergers and acquisitions, at least through the end
of 2002 at which time new accounting rules will apply, will result in a net
loss, which will have a material and adverse effect on our results of
operations.
The downturn in telecommunications equipment and financial markets created
unique circumstances with regard to the assessment of certain of our long-lived
assets and investments. In the second half of fiscal 2001, we evaluated the
carrying value of certain long-lived assets and acquired equity investments,
consisting primarily of goodwill and other intangible assets and our investment
in ADVA. We were carrying a large amount of goodwill on our balance sheet
because of our significant acquisitions as accounting rules require that
goodwill be recorded based on stock prices at the time merger agreements are
executed and announced, and our merger agreements were negotiated and announced
at times when market valuations were considerably higher than at present.
On April 24, 2001, we announced that we were evaluating the carrying value
of certain long-lived assets and that such evaluation may result in an
approximately $40 billion reduction in goodwill for the quarter ended March 31,
2001. On July 26, 2001, we announced that we were recording reductions of $38.7
billion and $6.1 billion in goodwill and other intangible assets for the
quarters ended March 31, 2001 and June 30, 2001, respectively. In addition, we
announced we were recording a $715 million charge for the quarter ended March
31, 2001 to write down the value of our investment in ADVA. We also announced at
that time that we would be conducting a further assessment of our long-lived
assets and that further adjustments to our fiscal 2001 results may result from
this assessment. We subsequently completed this review and it resulted in our
recording additional charges to reduce goodwill and other long-lived assets of
$1.1 billion and $4.2 billion during the quarters ended March 31, 2001 and June
30, 2001, respectively.
We also reclassified $300.9 million in amounts paid to certain SDL
executives in connection with the acquisition which were previously recorded as
acquisition costs in the quarter ended March 31, 2001 as a one-time charge for
that period. We also recorded a $715 million charge for that period to write
down the value of our equity investment in ADVA.
The largest portion of our goodwill arose from the merger of JDS FITEL and
Uniphase and the subsequent acquisition of SDL, E-TEK, and OCLI. The businesses
associated with these business combinations remain significant operations within
JDS Uniphase notwithstanding the current business downturn and change in market
valuations and each is forecasted to produce positive cash flows over future
periods. The goodwill resulted from our acquiring strategic companies when
valuations were high. However, while we purchased highly valued shares, we were
also in effect exchanging our highly valued shares at the same time so that none
of the transactions resulting in creation of large goodwill balances resulted
from a corresponding
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outlay of our cash. Had these transactions been done at different times when
valuations were lower with exactly the same share exchange ratios, the goodwill
amounts would have been considerably smaller. However, waiting for lower
valuations may have reduced their strategic value or otherwise have allowed
competitors to buy these companies thereby, eliminating an opportunity to
strengthen JDS Uniphase.
OUR SALES ARE DEPENDENT UPON A FEW KEY CUSTOMERS
Our customer base is highly concentrated. Historically, orders from a
relatively limited number of optical system providers accounted for a
substantial portion of our net sales. During 2001, three customers, Nortel
Networks Corporation, Alcatel, and Lucent Technologies, Inc., accounted for 14
percent, 12 percent and 10 percent of net sales, respectively. During 2000,
Lucent Technologies, Inc., and Nortel Networks Corporation, accounted for 21
percent and 15 percent of net sales, respectively. We expect that, for the
foreseeable future, sales to a limited number of customers will continue to
account for a high percentage of our net sales. Sales to any single customer may
vary significantly from quarter to quarter. If current customers do not continue
to place orders, we may not be able to replace these orders with new orders from
new customers. In the telecommunications industry, our customers evaluate our
products and competitive products for deployment in their telecommunications
systems. Our failure to be selected by a customer for particular system projects
can significantly impact our business, operating results and financial
condition. Similarly, even if our customers select us, the failure of those
customers to be selected as the primary suppliers for an overall system
installation could adversely affect us. Such fluctuations could materially harm
our business.
INTERRUPTIONS AFFECTING OUR KEY SUPPLIERS COULD DISRUPT PRODUCTION, COMPROMISE
OUR PRODUCT QUALITY AND ADVERSELY AFFECT OUR SALES
We obtain various components included in the manufacture of our products
from single or limited source suppliers. A disruption or loss of supplies from
these companies or a price increase for these components would materially harm
our results of operations, product quality and customer relationships. In
addition, we currently utilize a sole source for the crystal semiconductor chip
sets incorporated in our solid state microlaser products for use in our solid
state laser products from Opto Power Corporation and GEC. We obtain lithium
niobate wafers, gallium arsenide wafers, specialized fiber components and some
lasers used in our telecommunications products primarily from Crystal
Technology, Inc., Fujikura, Ltd., Philips Key Modules and Sumitomo,
respectively. We do not have long-term or volume purchase agreements with any of
these suppliers, and these components may not in the future be available in the
quantities required by us, if at all.
ANY FAILURE TO REMAIN COMPETITIVE IN OUR INDUSTRY WOULD HARM OUR OPERATING
RESULTS
If Our Business Operations Are Insufficient to Remain Competitive in Our
Industry, Our Operating Results Could Suffer
The telecommunications markets in which we sell our products are highly
competitive and characterized by rapidly changing and converging technologies.
We face intense competition from established competitors and the threat of
future competition from new and emerging companies in all aspects of our
business. Among our current competitors are our customers, who are vertically
integrated and either manufacture and/or are capable of manufacturing some or
all of the products we sell to them. In addition to our current competitors, we
expect that new competitors providing niche, and potentially broad, product
solutions will increase in the future. While the current economic downturn has
reduced the overall level of business in our industry, the competition for that
business remains fierce. To remain competitive in both the current and future
business climates, we believe we must maintain a substantial commitment to
focused research and development, improve the efficiency of our manufacturing
operations, and streamline our marketing and sales efforts, and attendant
customer service and support. Under our Global Realignment Program, we have
ongoing initiatives in each of these areas. However, our efforts to remain
competitive, under the Global Realignment Program and otherwise, may be
unsuccessful. Among other things, we may not have sufficient resources to
continue to make the investments necessary to remain competitive, or we may not
make the technological advances necessary to remain competitive. In addition,
notwithstanding our efforts, technological changes, manufactur-
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ing efficiencies or development efforts by our competitors may render our
products or technologies obsolete or uncompetitive.
Our Industry is Consolidating
Our industry is consolidating and we believe it will continue to
consolidate in the future as companies attempt to strengthen or hold their
market positions in an evolving industry. We anticipate that consolidation will
accelerate as the result of the current industry downturn. We believe that
industry consolidation may result in stronger competitors that are better able
to compete as sole-source vendors for customers. This could lead to more
variability in operating results as we compete to be a single vendor solution
and could hurt our business.
Fiber Optic Component Average Selling Prices Are Declining
Prices for telecommunications fiber optic products generally decline over
time as new and more efficient components and modules, with increased
functionality, are developed, manufacturing processes improve and competition
increases. The current economic downturn has exacerbated the general trend, as
declining sales have forced telecommunications carriers and their systems
provider suppliers to reduce costs, leading to increasing pricing pressure on us
and our competitors. Weakened demand for optical components and modules has
created an oversupply of these products, which has increased pressure on us to
reduce our prices. To the extent this oversupply is not corrected in subsequent
periods, we anticipate continuing pricing pressure. Moreover, currently, fiber
optic networks have significant excess capacity. Industry participants disagree
as to the amount of this excess capacity. However, to the extent that there is
significant overcapacity and this capacity is not profitably utilized in
subsequent periods, we expect to face additional pricing pressure.
In response to pricing pressure, we must continue to (1) timely develop and
introduce new products that incorporate features that can be sold at higher
selling prices, (2) increase the efficiency of our manufacturing operations, and
(3) generally reduce costs. Failure to do so could cause our net sales and gross
margins to decline, which would harm our business.
If We Fail to Attract and Retain Key Personnel, Our Business Could Suffer
Our future depends, in part, on our ability to attract and retain key
personnel. In addition, our research and development efforts depend on hiring
and retaining qualified engineers. Competition for highly skilled engineers is
extremely intense, and, the current economic downturn notwithstanding, we
continue to face difficulty identifying and hiring qualified engineers in many
areas of our business. We may not be able to hire and retain such personnel at
compensation levels consistent with our existing compensation and salary
structure. Our future also depends on the continued contributions of our
executive officers and other key management and technical personnel, each of
whom would be difficult to replace. We do not maintain a key person life
insurance policy on our chief executive officer or any other officer. The loss
of the services of one or more of our executive officers or key personnel or the
inability to continue to attract qualified personnel could delay product
development cycles or otherwise materially harm our business.
WE FACE RISKS RELATED TO OUR INTERNATIONAL OPERATIONS AND SALES
Our customers are located throughout the world. In addition, we have
significant offshore operations, including manufacturing facilities, sales
personnel and customer support operations. Our operations outside North America
include facilities in the United Kingdom, the Netherlands, Germany, Australia
and the People's Republic of China.
Our international presence exposes us to risks not faced by wholly North
American companies. Specifically, we face the following risks, among others:
- our ability to comply with the customs, import/export and other trade
compliance regulations of the countries in which we do business, together
with any unexpected changes in such regulations;
- tariffs and other trade barriers;
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- political, legal and economic instability in foreign markets,
particularly in those markets in which we maintain manufacturing and
research facilities;
- difficulties in staffing and management;
- language and cultural barriers;
- seasonal reductions in business activities in the summer months in Europe
and some other countries;
- integration of foreign operations;
- longer payment cycles;
- greater difficulty in accounts receivable collection;
- currency fluctuations; and
- potentially adverse tax consequences.
Net sales to customers outside the United States and Canada accounted for
$1,043.4 million, $326.7 million and $114.4 million or 32 percent, 23 percent,
and 40 percent of net sales for the years ended June 30, 2001, 2000 and 1999,
respectively. We expect that sales to customers outside of North America will
continue to account for a significant portion of our net sales. We continue to
expand our operations outside of the United States and to enter additional
international markets, both of which will require significant management
attention and financial resources.
Since a significant portion of our foreign sales are denominated in U.S.
dollars, our products may also become less price competitive in countries in
which local currencies decline in value relative to the U.S. dollar. Lower sales
levels that typically occur during the summer months in Europe and some other
overseas markets may also materially and adversely affect our business.
Furthermore, the sales of many of our optical system provider customers depend
on international sales and consequently further exposes us to the risks
associated with such international sales.
We have significant and increasing operations in the People's Republic of
China and those operations are subject to greater political, legal and economic
risks than those faced by our other international operations. In particular, the
political, legal and economic climate in China is extremely fluid and
unpredictable. Among other things, the legal system in China, both at the
national and regional levels, remains highly underdeveloped and subject to
change, with little or no prior notice, for political or other reasons.
Moreover, the enforceability of applicable existing Chinese laws and regulations
is uncertain. These concerns are exacerbated for foreign businesses, such as
ours, operating in China. Our business could be materially harmed by any
modifications to the political, legal or economic climate in China or the
inability to enforce applicable Chinese laws and regulations.
IF WE HAVE INSUFFICIENT PROPRIETARY RIGHTS OR IF WE FAIL TO PROTECT THOSE WE
HAVE, OUR BUSINESS WOULD BE MATERIALLY HARMED
We May Not Obtain the Intellectual Property Rights We Require
Others, including academic institutions and our competitors hold numerous
patents in the industries in which we operate. We may seek to acquire license
rights to these or other patents or other intellectual property to the extent
necessary for our business. Unless we are able to obtain such licenses on
commercially reasonable terms, patents or other intellectual property held by
others could inhibit our development of new products for our markets. While in
the past licenses generally have been available to us where third-party
technology was necessary or useful for the development or production of their
products, in the future licenses to third-party technology may not be available
on commercially reasonable terms, if at all. Generally, a license, if granted,
includes payments by us of up-front fees, ongoing royalties or a combination
thereof. Such royalty or other terms could have a significant adverse impact on
our operating results. We are a licensee of a number of third-party technologies
and intellectual properties rights and are required to pay royalties to these
third-party licensors on some of our telecommunications products and laser
subsystems.
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Our Products May Be Subject to Claims That They Infringe the Intellectual
Property Rights of Others
The industry in which we operate experiences periodic claims of patent
infringement or other intellectual property rights. We have in the past and may
from time to time in the future receive notices from third parties claiming that
our products infringe upon third-party proprietary rights. Any litigation to
determine the validity of any third-party claims, regardless of the merit of
these claims, could result in significant expense to us and divert the efforts
of our technical and management personnel, whether or not we are successful in
such litigation. If we are unsuccessful in any such litigation, we could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation. We
may not be successful in such development or such licenses may not be available
on terms acceptable to us, if at all. Without such a license, we could be
enjoined from future sales of the infringing product or products. We are
currently subject to various claims regarding third party intellectual property
rights. These claims are not expected to have a material adverse effect on our
business.
Our Intellectual Property Rights May Not Be Adequately Protected
Our future depends in part upon our intellectual property, including trade
secrets, know-how and continuing technological innovation. We currently hold
numerous U.S. patents on products or processes and corresponding foreign patents
and have applications for some patents currently pending. The steps taken by us
to protect our intellectual property may not adequately prevent misappropriation
or ensure that others will not develop competitive technologies or products.
Other companies may be investigating or developing other technologies that are
similar to our own. It is possible that patents may not be issued from any
application pending or filed by us and, if patents do issue, the claims allowed
may not be sufficiently broad to deter or prohibit others from marketing similar
products. Any patents issued to us may be challenged, invalidated or
circumvented. Further, the rights under our patents may not provide a
competitive advantage to us. In addition, the laws of some territories in which
our products are or may be developed, manufactured or sold, including Asia,
Europe or Latin America, may not protect our products and intellectual property
rights to the same extent as the laws of the United States.
IF WE FAIL TO SUCCESSFULLY MANAGE OUR EXPOSURE TO WORLDWIDE FINANCIAL MARKETS,
OUR OPERATING RESULTS COULD SUFFER
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. We
utilize derivative financial instruments to mitigate these risks. We do not use
derivative financial instruments for speculative or trading purposes. The
primary objective of our investment activities is to preserve principal while at
the same time maximizing yields without significantly increasing risk. To
achieve this objective, a majority of our marketable investments are floating
rate and municipal bonds, auction instruments and money market instruments
denominated in U.S. dollars. We mitigate currency risks of investments
denominated in foreign currencies with forward currency contracts. If we
designate such contracts as hedges and they are determined to be effective,
depending on the nature of the hedge, changes in the fair value of derivatives
will be offset against the change in fair value of assets, liabilities or firm
commitments through earnings (fair value hedges) or recognized in other
comprehensive income until the hedged item is recognized in earnings (cash flow
hedges). The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. A substantial portion of our sales, expense
and capital purchasing activities are transacted in U.S. dollars. However, we do
enter into these transactions in other currencies, primarily Canadian and
European currencies. To protect against reductions in value and the volatility
of future cash flows caused by changes in foreign exchange rates, we enter into
foreign currency forward contracts. The contracts reduce, but do not always
entirely eliminate, the impact of foreign currency exchange rate movements.
Actual results on our financial position may differ materially.
IF WE FAIL TO OBTAIN ADDITIONAL CAPITAL AT THE TIMES, IN THE AMOUNTS AND UPON
THE TERMS REQUIRED, OUR BUSINESS COULD SUFFER
We have devoted substantial resources for new facilities and equipment to
the production of our products. Currently we are incurring substantial costs
associated with restructuring our business and operations under
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our Global Realignment Program. Although we believe existing cash balances, cash
flow from operations, available lines of credit, and proceeds from the
realization of investments in other businesses will be sufficient to meet our
capital requirements at least for the next 12 months, we may be required to seek
additional equity or debt financing to compete effectively in these markets. We
cannot precisely determine the timing and amount of such capital requirements
and will depend on several factors, including our acquisitions and the demand
for our products and products under development. Such additional financing may
not be available when needed, or, if available, may not be on terms satisfactory
to us.
OUR CURRENTLY OUTSTANDING PREFERRED STOCK AND OUR ABILITY TO ISSUE ADDITIONAL
PREFERRED STOCK COULD HARM THE RIGHTS OF OUR COMMON STOCKHOLDERS
Our board of directors has the authority to issue up to 799,999 shares of
undesignated preferred stock and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued shares of undesignated preferred stock and to fix the number
of shares constituting any series and the designation of such series, without
the consent of our stockholders. The preferred stock could be issued with
voting, liquidation, dividend and other rights superior to those of the holders
of common stock.
The issuance of preferred stock under some circumstances could have the
effect of delaying, deferring or preventing a change in control. Each
outstanding share of our common stock includes one-eighth of a right. Each right
entitles the registered holder, subject to the terms of the rights agreement, to
purchase from us one unit, equal to one one-thousandth of a share of series B
preferred stock, at a purchase price of $3,600 per unit, subject to adjustment,
for each share of common stock held by the holder. The rights are attached to
all certificates representing outstanding shares of our common stock, and no
separate rights certificates have been distributed. The purchase price is
payable in cash or by certified or bank check or money order payable to our
order. The description and terms of the rights are set forth in a rights
agreement between us and American Stock Transfer & Trust Company, as rights
agent, dated as of June 22, 1998, as amended from time to time.
Some provisions contained in the rights plan, and in the equivalent rights
plan that our subsidiary, JDS Uniphase Canada Ltd., has adopted with respect to
our exchangeable shares, may have the effect of discouraging a third party from
making an acquisition proposal for us and may thereby inhibit a change in
control. For example, such provisions may deter tender offers for shares of
common stock or exchangeable shares which offers may be attractive to the
stockholders, or deter purchases of large blocks of common stock or exchangeable
shares, thereby limiting the opportunity for stockholders to receive a premium
for their shares of common stock or exchangeable shares over the then-prevailing
market prices.
SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CHARTER AND UNDER DELAWARE LAWS
COULD HINDER A TAKEOVER ATTEMPT
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law prohibiting, under some circumstances, publicly-held Delaware
corporations from engaging in business combinations with some stockholders for a
specified period of time without the approval of the holders of substantially
all of our outstanding voting stock. Such provisions could delay or impede the
removal of incumbent directors and could make more difficult a merger, tender
offer or proxy contest involving us, even if such events could be beneficial, in
the short term, to the interests of the stockholders. In addition, such
provisions could limit the price that some investors might be willing to pay in
the future for shares of our common stock. Our certificate of incorporation and
bylaws contain provisions relating to the limitations of liability and
indemnification of our directors and officers, dividing our board of directors
into three classes of directors serving three-year terms and providing that our
stockholders can take action only at a duly called annual or special meeting of
stockholders. These provisions also may have the effect of deterring hostile
takeovers or delaying changes in control or management of us.
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FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. A forward-looking
statement may contain words such as "plans," "hopes," "believes," "estimates,"
"will continue to be," "will be," "continue to," "expect to," "anticipate that,"
"to be" or "can impact." These forward-looking statements include statements
relating to our expectations as to:
- the future prospects for and growth of our Company and our industry,
including, without limitation, (a) the extent and duration of the current
economic downturn, (b) the timing and extent of any recovery from such
downturn, (c) the viability, development and growth of new fiber optic
telecommunications markets, including the metro and fiber to the curb
markets, and (d) the benefits and opportunities for us and others in our
industry provided by such new markets;
- the implementation of our Global Realignment Program, the timing and
level of benefits we expect to receive as a result of the Program, and
the expected cost to complete the Program, including, without limitation,
(a) the level of the expected workforce reductions, (b) the benefits we
expect to receive from the elimination and consolidation of research and
development programs and manufacturing facilities, and (c) the benefits
we expect to receive from integrating our sales force and restructuring
our customer service programs;
- the capabilities of, and customer demand for, our products, the breadth
and scope of our product line, our ability to supply 100% of our
customers' component, module and subsystem needs and our ability to
capitalize on opportunities for module and subsystem level products;
- the demand for products providing greater integration and functionality,
and any system cost reductions resulting from the integration of
components into single box modules and subsystems;
- our customers' desire to (a) reduce the number of their outside vendors,
(b) reduce the level of their vertical integration, and (c) focus on
overall system design and architecture;
- our strategy for the future, our ability to implement such strategy
successfully at an acceptable cost and any benefits expected to be
received through the implementation of such strategy, including our
strategies to (a) maintain close customer relationships, (b) maintain our
technology leadership and product reliability, (c) offer a comprehensive
portfolio of fiber optic components and modules, (d) develop modules and
subsystems, (e) structure our manufacturing capabilities for maximum
efficiency and quality, and (f) seek complementary mergers and
acquisitions;
- modifications being made to our sales and marketing and customer support
and service programs, and our ability to complete such modifications at
an acceptable cost and realize benefits therefrom;
- our global Oracle implementation, the costs thereof and any benefits
expected to be realized therefrom;
- our research and development programs, including, without limitation, the
costs thereof, the anticipated completion of our R&D programs, new
product introductions and projected revenue from new and developing
products and technologies;
- our employee relations;
- our allowance for deferred tax assets and the realization thereof;
- our expected future expenditures for capital equipment purchases and
leasehold improvements;
- the sufficiency of existing cash balances and investments, together with
cash flow from operations and available lines of credit to meet our
liquidity and capital spending requirements for future periods; and
- the cost to complete our acquired in-process research and development
programs and the expected amortization of such costs.
Management cautions that forward-looking statements are subject to risks
and uncertainties that could cause our actual results to differ materially from
those projected in such forward-looking statements. These
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risks and uncertainties include, among other things, the risks that (1) the
current economic downturn may be more severe and long-lasting than we can
anticipate, and, notwithstanding our projects, beliefs and expectations for our
business, may cause our business and financial condition to suffer, (2) due to
the current economic slowdown, in general, and setbacks in our customers'
businesses, in particular, our ability to predict our financial performance, in
particular, and our future success, in general, for future periods is far more
difficult than in previous periods; (3) our ongoing integration and
restructuring efforts, including, among other things, the Global Realignment
Program, may not be successful in achieving their expected benefits, may be
insufficient to align our operations with customer demand and the changes
affecting our industry, or may be more costly or extensive than currently
anticipated (4) increasing pricing pressure, as the result of the economic
downturn and competitive factors, may harm our revenue and profit margins; (5)
our research and development programs may be insufficient or too costly or may
not produce new products, with performance, quality, quantity and price levels
satisfactory to our customers; and (6) our ongoing efforts to reduce product
costs to our customers, through, among other things, automation, improved
manufacturing processes and product rationalization may be unsuccessful.
Further, our future business, financial condition and results of operations
could differ materially from those anticipated by such forward-looking
statements and are subject to risks and uncertainties including the risks set
forth above. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this Annual Report on Form 10-K to conform such statements to actual results or
to changes in our expectations.
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ITEM 2. PROPERTIES
Our principal offices are located in San Jose, California and Ottawa,
Ontario, Canada. The table below summarizes the properties owned and leased as
of June 30, 2001.
LEASED PROPERTIES AS OF JUNE 30, 2001:
<Table>
<Caption>
SITE SQUARE FOOTAGE
---- --------------
USA, San Jose, California................................... 599,290
USA, Santa Rosa, California................................. 82,362
USA, Manteca, California.................................... 20,000
USA, Bloomfield, Connecticut................................ 327,850
USA, Melbourne, Florida..................................... 96,900
USA, Billerica, Massachusetts............................... 34,500
USA, Norwood, Massachusetts................................. 20,800
USA, Rochester, New York.................................... 33,110
USA, Trenton, New Jersey.................................... 132,000
USA, Freehold, New Jersey................................... 16,000
USA, Eatontown, New Jersey.................................. 84,000
USA, Piscataway, New Jersey................................. 132,000
USA, RTP, North Carolina.................................... 181,000
USA, Horsham, Pennsylvania.................................. 120,000
USA, Richardson, Texas...................................... 24,000
Canada, Ontario, Ottawa..................................... 706,420
Canada, Ontario, Toronto.................................... 28,062
Canada, British Columbia, Victoria.......................... 54,750
Australia, Sydney........................................... 65,689
China, Fuzhou............................................... 444,366
China, Shenzen.............................................. 330,827
China, Shunde............................................... 26,437
China, Beijing.............................................. 23,400
Hong Kong................................................... 2,914
Taiwan, Taipei.............................................. 57,220
Scotland, Fife.............................................. 9,000
Japan, Tokyo................................................ 859
Japan, Kanagawaan........................................... 2,804
Japan, Atsugi, Japan........................................ 18,000
Netherlands, Eindhoven...................................... 170,300
United Kingdom, Witney...................................... 9,900
United Kingdom, Yarnton..................................... 60,000
United Kingdom, Plymouth.................................... 20,000
United Kingdom, Torquay..................................... 65,000
United Kingdom, Berkshire................................... 40,530
United Kingdom, Luton....................................... 3,000
United Kingdom, Witham...................................... 28,500
Germany, Eching............................................. 8,712
France, Grenoble............................................ 9,306
TOTAL LEASED SQUARE FOOTAGE................................. 4,089,808
</Table>
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OWNED PROPERTIES AS OF JUNE 30, 2001
<Table>
<Caption>
SITE SQUARE FOOTAGE
---- --------------
USA, San Jose, California................................... 284,106
USA, Santa Rosa, California................................. 493,560
USA, Columbus, Ohio......................................... 105,000
USA, Trenton, New Jersey.................................... 77,000
USA, Asheville, North Carolina.............................. 11,200
USA, Melbourne, Florida..................................... 60,000
Canada, Ontario, Ottawa..................................... 813,000
Scotland, Hillend........................................... 56,000
China, Fuzhou............................................... 84,163
Taiwan, Taipei.............................................. 226,060
United Kingdom, Plymouth.................................... 25,000
United Kingdom, Torquay..................................... 15,000
United Kingdom, Berkshire................................... 5,210
TOTAL OWNED SQUARE FOOTAGE.................................. 2,255,299
TOTAL SQUARE FOOTAGE OWNED AND LEASED:...................... 6,345,107
</Table>
As part of our restructuring plans announced in April 2001 and July 2001,
we are in the process of consolidating our properties around the world.
Currently, it is projected that we will decrease our square footage by almost
two million square feet, from 6.3 million to 4.4 million square feet.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, various lawsuits and claims are filed
against us. We also maintain various lawsuits and claims. While the outcome of
these matters is currently not determinable, management believes that the
ultimate resolution of these matters will not have a material adverse effect on
our financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At August 23, 2001, we had approximately 1,595,798 holders of record of our
common stock and exchangeable shares. We had 1,170,658,929 common shares and
153,553,002 exchangeable shares outstanding on the Nasdaq National Market and
the Toronto Stock Exchange, respectively. Holders of exchangeable shares may
tender their holdings for common stock on a one-for-one basis at any time. The
closing price on August 23, 2001 for the common stock and the exchangeable
shares was $7.02 and Canadian $11.76, respectively. We have not paid cash
dividends on our common stock and do not anticipate paying cash dividends in the
foreseeable future. The following high and low closing sale prices indicated for
our common stock are as reported on the Nasdaq National Market during each of
the quarters indicated. The prices in the
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following table have been adjusted to reflect all previous stock dividends and
splits through the date of this Annual Report on Form 10-K.
<Table>
<Caption>
HIGH LOW
------- ------
Fiscal 2001 Quarter Ended:
June 30................................................... $ 28.53 $10.00
March 31.................................................. $ 63.88 $17.50
December 31............................................... $102.37 $40.94
September 30.............................................. $135.94 $94.69
Fiscal 2000 Quarter Ended:
June 30................................................... $128.94 $79.00
March 31.................................................. $146.53 $74.88
December 31............................................... $ 83.61 $28.81
September 30.............................................. $ 29.14 $19.63
</Table>
During the second and third quarter of 2001, the Company issued 1.4 million
shares of the Company's common stock in connection with the acquisition of Epion
Corporation valued at $89.2 million. These shares were issued in connection with
milestones achieved as part of initial purchase agreement. The issuance of the
common stock was exempt from registration pursuant to Section 3(a)(10) of the
Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEARS ENDED JUNE 30, 2001(2)(3) 2000(4)(5) 1999(6) 1998 1997
-------------------- ---------- ---------- -------- ------ ------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 3,232.8 $ 1,430.4 $ 282.8 $185.2 $113.2
Amortization of purchased intangibles....... $ 5,387.0 $ 896.9 $ 15.7 $ 5.6 $ 1.8
Acquired in-process research and $ 393.2 $ 360.7 $ 210.4 $ 40.3 $ 33.3
development...............................
Merger and other costs (1).................. $ -- $ -- $ 6.8 $ -- $ --
Reduction of goodwill and other long-lived $ 50,085.0 $ -- $ -- $ -- $ --
assets....................................
Restructuring charges....................... $ 264.3 $ -- $ -- $ -- $ --
Loss from operations........................ $(56,347.4) $ (865.1) $ (153.2) $(11.5) $(15.8)
Net loss.................................... $(56,121.9) $ (904.7) $ (171.1) $(19.6) $(17.8)
Loss per share:
Basic..................................... $ (51.40) $ (1.27) $ (0.54) $(0.07) $(0.07)
Dilutive.................................. $ (51.40) $ (1.27) $ (0.54) $(0.07) $(0.07)
Shares used in per share calculation:
Basic..................................... 1,091.9 710.9 318.2 283.6 269.5
Dilutive.................................. 1,091.9 710.9 318.2 283.6 269.5
</Table>
<Table>
<Caption>
AT JUNE 30, 2001 2000 1999 1998 1997
----------- ---------- --------- -------- ------ ------
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 2,187.8 $ 1,325.7 $ 314.8 $121.4 $110.2
Total assets................................ $ 12,245.4 $26,389.1 $4,096.1 $332.9 $180.7
Long-term obligations....................... $ 18.0 $ 61.2 $ 9.8 $ 5.7 $ 2.5
Total stockholders' equity.................. $ 10,706.5 $24,778.6 $3,619.3 $280.0 $152.0
</Table>
---------------
(1) Results of operations include $5.9 million of costs and expenses
attributable to the pooling of interests transaction with Uniphase Broadband
Products, and $0.9 million loss on sale of the Ultrapointe Systems assets in
1999.
(2) JDS Uniphase merged with SDL, Inc. on February 13, 2001 in a transaction
accounted for as a purchase. The consolidated statement of operations for
2001 and the consolidated balance sheet data as of June 30, 2001 include the
results of operations subsequent to February 13, 2001 and financial
position, respectively, of SDL.
(3) On February 13, 2001, the Company completed the sale of its Zurich,
Switzerland subsidiary to Nortel Networks ("Nortel") for 65.7 million shares
of Nortel common stock valued at $1,953.3 million, as well as up to an
additional $500.0 million in Nortel common stock payable to the extent
Nortel purchases do not meet certain levels under new and existing programs
through December 31, 2003. After adjusting for the net costs of the assets
sold and for the expenses associated with the divestiture, the Company
realized a gain of $1,770.2 million. The Company subsequently sold
approximately 41.0 million shares of Nortel stock resulting in a realized
loss of $559.1 million. In addition, the Company recognized a reduction in
the fair value of $511.8 million associated with the 24.7 million shares
held at June 30, 2001.
(4) JDS Uniphase merged with Optical Coating Laboratory, Inc. (OCLI) on February
4, 2000 in a transaction accounted for as a purchase. The consolidated
statement of operations for 2000 and the
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consolidated balance sheet data as of June 30, 2000 include the results of
operations subsequent to February 4, 2000 and financial position,
respectively, of OCLI.
(5) JDS Uniphase merged with E-TEK Dynamics, Inc. (E-TEK) on June 30, 2000 in a
transaction accounted for as a purchase. The consolidated balance sheet data
as of June 30, 2000 includes the financial position of E-TEK.
(6) JDS Uniphase merged with JDS FITEL on June 30, 1999 in a transaction
accounted for as a purchase. The consolidated balance sheet data as of June
30, 1999 includes the financial position of JDS FITEL.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
JDS Uniphase is a high technology company that designs, develops,
manufactures and distributes fiber optic components, modules and subsystems for
the fiber optic communications industry. These products are deployed in advanced
optical communications networks for the telecommunications and cable television
industries. Our products, fiber optic components, modules and subsystems, alone
and in combinations, perform all of these functions and are the building blocks
of fiber optic communications systems. We sell our products to the world's
leading and emerging telecommunications networking and cable television system
providers. These companies include established industry participants, such as
Alcatel, Ciena, Cisco, Corning, Lucent, Marconi, Motorola, Nortel, Siemens and
Tyco, along with emerging companies, such as Corvis, ONI Systems, Juniper
Networks and Sycamore. In turn, the system providers supply integrated systems
to telecommunications carriers such as AT&T, WorldCom, Qwest and Sprint. Our
component products include semiconductor lasers, high-speed external modulators,
transmitters, couplers, multiplexers, circulators, tunable filters, optical
switches and isolators for fiber optic applications. Our module and subsystem
level products include amplifiers, transponders, transceivers, optical
performance monitors and dispersion compensation modules. We also supply our
system provider customers with test instruments for both system production
applications and network installation. We also sell a number of other products
for applications outside the fiber optic industry that use the same or similar
technologies as those used in our fiber optics products business. These
additional products include commercial lasers, advanced light interference
pigments, optical display and projection products, and gas cluster ion beam
surface equipment used in a variety of markets, including the semiconductor and
biomedical industries.
In 2001, we changed our year-end from a fiscal year ending June 30, to a 52
week year ending on the Saturday closest to June 30. This change had no impact
on our results of operations, cash flows or financial position in 2001.
We are the product of several strategic mergers and acquisitions, including
the June 30, 1999 combination of Uniphase and JDS FITEL. During 2000, we
acquired the following companies and businesses, in chronological order: AFC
Technologies ("AFC"), Ramar Corporation ("Ramar"), EPITAXX, SIFAM, Oprel
Technologies Inc. ("Oprel"), IOT Limited ("IOT"), OCLI, Cronos, Fujian Casix
Lasers Inc. ("Casix") and E-TEK. During 2001, we acquired the following
companies and businesses in chronological order: Epion, Iridian, OPA, and SDL.
Consequently, while our historical results of operations for each year include
the results of operations of acquired companies from the date of acquisition,
our results from prior years, for comparison purposes, exclude such acquired
companies' results. Most significantly, the 2000 results of operations include a
full year's results of operations from the merger with JDS FITEL as well as the
post acquisition results of each of the companies mentioned above, while the
1999 results of operations include business activities from only Uniphase.
Accordingly, at the end of "Results of Operations -- Actual" we have
provided supplemental discussions of our 2000 actual results with 1999 pro forma
results, which combine the historical consolidated 1999 results of operations of
the former Uniphase Corporation for the 12 months ended June 30, 1999, with the
historical results of operations of JDS FITEL for the twelve months ended May
31, 1999, under the headings "Results of Operations -- Pro forma" and "Operating
Segment Information -- Pro forma." These pro forma results have been disclosed
in our Report on Form 8-K/A filed on May 22, 2000 and are hereby incorporated
herein by this reference.
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RECENT DEVELOPMENTS
INDUSTRY ENVIRONMENT AND OUR GLOBAL REALIGNMENT PROGRAM
INDUSTRY ENVIRONMENT
During the second half of the 1990s through calendar 2000, the fiber optic
communications industry experienced a period of considerable growth, and we
participated in that growth as a leading supplier in these markets. This growth
was attributable primarily to: (a) the introduction of wavelength division
multiplexing (WDM) technology (under which multiple light signals are
transmitted down a single optical fiber cable), which allowed the expansion of
fiber optic network capacity without the expense and time required to install
additional fiber cable; (b) the unprecedented growth during this period in data
traffic, in general, and the internet, in particular, which created
exponentially increasing demand for larger, faster and more robust networks
(commonly collectively referred to loosely as "bandwidth"); (c) the
Telecommunications Act of 1996, which sought to open existing proprietary
telecommunications infrastructures to multiple carriers, and, as a consequence,
created a market for new upstart telecommunications carriers (called competitive
local exchange carriers, or CLECs), each of which moved rapidly to deploy its
own network; and (d) an abundance of relatively low cost capital available for
network development and expansion. Together, these factors fueled a rapid and
substantial installation of fiber optic networks in anticipation of rapidly
growing bandwidth demand and future sales. As a result of the demand placed on
our system provider customers by established and emerging telecommunications
carriers, we faced mounting, unrelenting, demand during this period for our
products. In response, we focused much of our efforts on growing our business,
internally and through acquisitions, to meet the increasingly urgent needs of
our customers for higher performance products, increased product breadth and
expanded manufacturing capacity. As a result of these efforts, our quarterly
sales grew rapidly, for example increasing from $87 million for the quarter
ended June 30, 1999 to $925 million for the quarter ended December 31, 2000.
Since the beginning of calendar 2001, we and our industry have experienced
a dramatic downturn, the primary direct cause of which has been a precipitous
decrease in network deployment and capital spending by the telecommunications
carriers. This decrease can be attributable to, among other things: (a) network
overcapacity, as bandwidth demand, while continuing to grow, did not reach
levels sufficient to match the pace of network deployment; (b) constrained
capital markets; and (c) other factors, including the general inability of the
CLECs to obtain sufficient access to established telecommunications
infrastructures and consolidation among telecommunications carriers. All of the
above factors resulted in a decrease in the overall demand for new fiber optic
networks. In response, the carriers dramatically slowed their purchases of
systems from our customers, who in turned slowed purchases of components and
modules from our competitors and from us. Moreover, as their sales declined, our
customers moved to reduce their component and module inventory levels.
Consequently, the impact of the slowdown on our business is magnified, as we
face declining sales as the result of our customers' declining business and the
resulting adjustment to their inventory levels. Currently, we do not see a
reversal of the industry downturn.
In April 2001, we initiated the Global Realignment Program, under which we
are restructuring our business in response to the changes in our industry and
customer demand and as part of our continuing overall integration program.
During the fourth quarter of 2001 in connection with the Program, we recorded
$264.3 million of restructuring charges and $236.6 million of inventory
write-downs associated with discontinued products.
In addition, on April 24, 2001, we announced that we were evaluating the
carrying value of certain long-lived assets and that such evaluation may result
in an approximately $40 billion reduction in goodwill for the quarter ended
March 31, 2001. On July 26, 2001, we announced that we were recording reductions
of $38.7 billion and $6.1 billion in goodwill and other intangible assets for
the quarters ended March 31, 2001 and June 30, 2001, respectively. We also
announced at that time that we would be conducting a further assessment of our
long-lived assets and that further adjustments to our 2001 results may result
from this assessment. We subsequently completed this review, which resulted in
our recording additional charges to reduce goodwill and other long-lived assets
of $1.1 billion and $4.2 billion during the quarters ended March 31, 2001 and
June 30, 2001, respectively.
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32
The following paragraphs describe the Global Realignment Program in greater
detail. Please refer to the "Special Charges" section of Management's Discussion
and Analysis of Financial Condition and Results of Operations for further
details regarding the nature of the special charges including the charges
recorded to reduce goodwill and other long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121).
Global Realignment Program
In April 2001 we initiated our Global Realignment Program (the "Program"),
under which we are restructuring our business in response to the current market
environment and as part of our continuing program to integrate our operations.
Specific actions taken under the Global Realignment Program include:
- Reducing our workforce from approximately 29,000 employees to what we
anticipate will be approximately 13,000 employees.
- Eliminating overlapping product development programs and concentrating
our key product development activities in specific global centers, with
the goal to allocate our resources, both geographically and
technologically, to those products and technologies that we believe will
be most important to our customers.
- Consolidating our manufacturing, sales and administrative facilities,
through building and site closures, from a total of approximately 6.3
million square feet into approximately 4.4 million square feet. As of
June 30, 2001, nine sites have been closed or scheduled for closure:
Asheville, North Carolina; Bracknell, United Kingdom; Freehold, New
Jersey; Hillend, United Kingdom; Oxford, United Kingdom; Richardson,
Texas; Rochester, New York; Shunde, China and Taipei, Taiwan.
- Integrating our sales force to, among other things, provide each of our
customers with a single point of contact and, in the case of our larger
customers, a dedicated sales team. We have largely completed this task.
This year, we will expand our sales restructuring efforts to include our
customer service programs by creating technical and support centers to
streamline customer interactions with product line managers. Ultimately,
we intend that every customer have a single point of contact for order
placement, status updates, billing and related questions. We also intend
to exploit our global Oracle systems implementation to consolidate
administrative functions and realize cost savings in all areas of product
sales and support.
During the fourth quarter of 2001, we recorded total restructuring charges
of $264.3 million as part of the Global Realignment Program. In addition,
approximately $236.6 million of other charges primarily related to inventory
write-downs associated with discontinued products were also recorded in the
fourth quarter of 2001 as part of the Program. These charges were classified as
cost of sales. As announced on July 26, 2001, it is anticipated that the total
costs of the Global Realignment Program will be between $900 million and $950
million. We expect to recognize the majority of the additional charges
associated with the Program in the first quarter of 2002 once the specific plans
have been determined in sufficient detail and approved by management.
The Global Realignment Program is expected to reduce our costs by
approximately $700 million annually after its complete implementation, which is
expected by the end of fiscal 2002. We believe that the measures taken under the
Program will provide us the flexibility to meet our customers' current operating
needs without sacrificing our ability to expand our businesses and respond to
future increases in business levels.
The Global Realignment Program represents our concerted efforts to respond
to the current demands of our industry. However, these efforts may be
inappropriate or insufficient. The Global Realignment Program may not be
successful in achieving the benefits expected, may be insufficient to align our
operations with customer demand and the changes affecting our industry, or may
be more costly or extensive than currently anticipated.
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Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. In
addition, SFAS 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of Statement 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or after). We
are currently evaluating the impact of SFAS 141.
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives (but with
no maximum life). The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we will apply the new
accounting rules beginning June 30, 2002. Because of the different transition
dates for goodwill and intangible assets acquired on or before June 30, 2001 and
those acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not. We are
currently evaluating the impact of SFAS 142.
RESULTS OF OPERATIONS -- ACTUAL
The following table sets forth, for the periods indicated, certain actual
financial data as a percentage of net sales:
<Table>
<Caption>
YEARS ENDED JUNE 30,
-------------------------
2001 2000 1999
------- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 71.4% 52.5% 49.0%
------- ----- -----
Gross profit.............................................. 28.6% 47.5% 51.0%
Operating expenses:
Research and development.................................. 10.1% 7.9% 9.5%
Selling, general and administrative....................... 25.3% 12.2% 13.3%
Amortization of purchased intangibles..................... 166.6% 62.7% 5.6%
Acquired in-process research and development.............. 12.2% 25.2% 74.4%
Reduction of goodwill and other long-lived assets......... 1549.3% -- --
Restructuring charges..................................... 8.2% -- --
Merger and other costs.................................... -- -- 2.4%
------- ----- -----
Total operating expenses.................................... 1771.7% 108.0% 105.2%
------- ----- -----
Loss from operations........................................ (1743.1)% (60.5)% (54.2)%
Gain on sale of subsidiary................................ 54.8% -- --
Activity related to equity method investments............. (27.3)% -- --
Loss on sale of investments............................... (17.3)% -- --
Reduction in fair value of available-for-sale
investments............................................ (16.2)% -- --
Interest and other income, net............................ 1.5% 2.5% 1.3%
------- ----- -----
Loss before income taxes.................................. (1747.6)% (58.0)% (52.9)%
Income tax expense (benefit)................................ (11.5)% 5.2% 7.6%
------- ----- -----
Net loss.................................................... (1736.1)% (63.2)% (60.5)%
======= ===== =====
</Table>
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YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Net Sales. Net sales of $3,232.8 million for 2001 represented an increase
of $1,802.4 million or 126 percent over 2000 net sales of $1,430.4 million,
which increased $1,147.6 million or 406 percent over 1999 net sales of $282.8
million. However, quarterly net sales for the fourth quarter of 2001 as compared
to the third quarter of 2001 declined $319.0 million due to the current business
environment in the worldwide telecommunications industry. Net sales for the
Amplification and Transmission Group increased 91 percent in 2001 compared to
2000. The increase in net sales for the Amplification and Transmission Group was
due to the acquisitions of SDL and Epitaxx and higher unit sales volume of
optical amplifiers, transmitters, modulators and pump lasers. Net sales for the
WDM, Switching and Thin Film Filters Group increased 153 percent in 2001
compared to 2000. The increase in net sales for the WDM, Switching and Thin Film
Filters Group was primarily due to the acquisition of E-TEK and SDL and higher
unit sales volume in wavelength division multiplexers ("WDM"), instruments and
waveguides. The impact of the SDL and E-TEK acquisitions provided approximately
$804.1 million of net sales for 2001. The increase from 1999 to 2000 reflected
177 percent and 1,287 percent growth in our Amplification and Transmission and
WDM, Switching and Thin Film Filters segments, respectively. Net sales from JDS
FITEL are included for the entire year 2000, and net sales from the companies we
acquired in 2000 are included subsequent to their date of acquisition (see Note
10 of Notes to Consolidated Financial Statements). Separate discussions with
respect to net sales and operating profits by each of the reportable operating
segments can be found following the Results of Operations -- Pro forma section.
Net sales to customers outside the United States and Canada accounted for
$1,043.4 million, $326.7 million and $114.4 million or 32 percent, 23 percent,
and 40 percent of net sales for the years ended June 30, 2001, 2000 and 1999,
respectively. The increase in net sales outside of North America from 2000 to
2001 is primarily due to the inclusion of a full year's sales from E-TEK and the
acquisition of SDL during 2001. The 2001 growth in international sales was
primarily in Europe. The increase in sales from 1999 to 2000 is primarily due to
the inclusion of JDS FITEL sales, as well as the acquisitions of OCLI, SIFAM,
Oprel and AFC during 2000. The decrease in international sales as a percentage
of net sales from 1999 to 2000, is primarily due to the inclusion of JDS FITEL,
which sells a higher mix of its products to customers in the U.S. and Canada.
During 2001, three customers, Nortel, Alcatel, and Lucent Technologies,
Inc., accounted for 14 percent, 12 percent and 10 percent of consolidated net
sales, respectively. During 2000, Lucent Technologies, Inc., and Nortel,
accounted for 21 percent and 15 percent of consolidated net sales, respectively.
During 1999, none of the our customers exceeded 10 percent of consolidated net
sales. Sales to our leading customers vary significantly from year to year and
we do not have the ability to predict future sales to these customers.
Net sales for 2001 are not considered indicative of the results to be
expected for any future period. In addition, there can be no assurance that the
market for our 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 we will be able to increase or maintain our market share in the
future or to achieve historical growth rates.
Gross Margin. Gross margin as a percentage of net sales was 29 percent in
2001, compared to 48 percent and 51 percent for 2000 and 1999, respectively.
Three factors contributed to the decrease in gross margins during 2001. These
were: (i) inventory write-downs and loss on purchase commitments of
approximately $570.4 million resulting from lower sales estimates for future
periods and product consolidations and discontinuations in connection with the
Global Realignment Program during the fourth quarter of 2001 (see Special
Charges), (ii) the impact of purchase accounting adjustments of $71.5 million to
reflect the fair value of inventory associated with acquired entities, and (iii)
non-cash stock compensation of $18.2 million. The decline in gross margin as a
percentage of net sales from 1999 to 2000 reflects the impact of $25.3 million
in purchase accounting adjustments to reflect the fair value of JDS FITEL,
EPITAXX, SIFAM, OCLI and Cronos inventories. Gross margin was also reduced by a
$22.6 million write-down of inventory related to the E-TEK acquisition based on
management's decision subsequent to the acquisition to discontinue using certain
inventory. Reductions in average selling prices were largely offset by
reductions in manufacturing costs through automation, yield improvements and
other improvements in the manufacturing processes.
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35
Our gross margin can experience reduced or delayed product shipments or be
affected by a number of factors, including product mix, customer mix,
applications mix, product demand, pricing pressures, manufacturing constraints,
higher costs resulting from new production facilities, product yield, and
acquisitions of businesses that may have different margins than ours. If actual
orders do not match our forecasts, as we experienced in the second half of 2001,
we may have excess or shortfalls of some materials and components as well as
excess inventory purchase commitments. Furthermore, we could incur additional
inventory write-downs and cancellation charges or penalties, which would
increase our costs and could seriously harm our business. Considering these
factors, gross margin fluctuations are difficult to predict and there can be no
assurance that we will achieve or maintain gross margin percentages at
historical levels in future periods.
Research and Development Expense. For 2001, research and development
("R&D") was $325.9 million, or 10 percent of net sales as compared to $113.4
million, or 8 percent of net sales for the corresponding 2000 period. The
increase in R&D spending is primarily due to the continued development and
enhancement of our Amplification and Transmission, and WDM, Switching and Thin
Film Filters products and the inclusion of our acquisitions completed during
2001.
For 2000, R&D expense of $113.4 million or 8 percent of net sales
represented an increase of $86.4 million or 320 percent over 1999 expense of
$27.0 million or 10 percent of net sales. The increase in R&D expenses is
primarily due to increased personnel costs and other expenses related to the
development of new products and technologies, and the continued development and
enhancement of existing products, the inclusion of JDS FITEL for the entire year
of 2000, and the inclusion of our acquisitions during 2000 from the date of
acquisition.
We believe that continued investment in R&D is critical to attaining our
strategic objectives. However, due to our recently announced Global Realignment
Program, we expect our absolute dollar amount of R&D expenses to decrease over
the next three quarters. 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.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense was $818.1 million, or 25 percent of net sales
for 2001 compared to $172.9 million, or 12 percent of net sales for 2000. The
increase in SG&A was primarily due to the following: (i) one-time compensation
related charge for amounts paid to certain SDL executives in connection with the
acquisition of SDL of $300.9 million (see Note 10 of Notes to Consolidated
Financial Statements); (ii) higher personnel-related costs to support the growth
in sales and operations; (iii) expansion of the information systems
infrastructure to manage the our growth; (iv) inclusion of our E-TEK and SDL
acquisitions; (v) non-cash stock compensation charges of $24.2 million
associated with certain of our acquisitions; (vi) increase in bad debt expense
of $25.6 million, reflecting the current instability in our industry; (vii)
litigation settlement of approximately $22.8 million; and (viii) higher payroll
tax expenses related to the exercise of non-qualified stock option exercises of
$20.9 million.
For 2000, SG&A of $172.9 million or 12 percent of net sales represented an
increase of $135.5 million or 362 percent over 1999 expense of $37.4 million or
13 percent of net sales. The increase in 2000 is primarily due to higher SG&A
costs resulting from the hiring of additional sales, marketing and
administrative personnel, the inclusion of JDS FITEL for the entire year of
2000, and the inclusion of acquisitions completed during 2000. As a percentage
of net sales, SG&A for 2000 was consistent with 1999.
We expect the level of SG&A expenses to decrease in the future as part of
our Global Realignment Program (see Note 12 of Notes to Consolidated Financial
Statements). We also expect to continue incurring charges to operations, which
to date have been within management's expectations, associated with integrating
recent acquisitions.
Amortization of Purchased Intangibles. Since 1995, we have entered into
several mergers and acquisitions that resulted in the recording of approximately
$63.9 billion in identified intangible assets (primarily developed technology)
and goodwill. In 2001, amortization of purchased intangibles ("API") was
$5,387.0 million or 167 percent of net sales, which represented an increase of
$4,490.1 million or 501 percent over 2000 API of $896.9 million or 63 percent of
net sales. The increase in API is primarily due to the
34
36
intangible assets generated from the acquisition of E-TEK in June 2000, and the
acquisitions of SDL, OPA, Iridian and Epion during 2001 (see Note 10 of Notes to
Consolidated Financial Statements).
In 2000, API was $896.9 million or 63 percent of net sales, which
represented an increase of $881.2 million or 5,613 percent over 1999 API of
$15.7 million or 6 percent of net sales. The increase in API is primarily due to
the intangible assets generated from the acquisition of JDS FITEL in June 1999,
and the acquisitions of AFC, Ramar, EPITAXX, SIFAM, Oprel, IOT, OCLI, Cronos,
and Casix during 2000 (see Note 10 of Notes to Consolidated Financial
Statements).
In connection with each of our acquisitions, we determined the useful lives
of each of the identified intangible assets and goodwill. For our significant
acquisitions, the useful lives were based upon independent valuations as well as
market forecasts. Although we recorded a significant charge in 2001 to reduce
the carrying value of our goodwill and purchased intangible assets, we continue
to believe the remaining goodwill and purchased intangible assets will provide
benefit to us over periods consistent with the established useful lives.
Our API expense will continue to generate net losses at least through the
end of 2002 at which time new accounting rules will apply. The balance at June
30, 2001, of goodwill and other intangibles arising from acquisition activity
was $7.0 billion (see Note 10 of Notes to Consolidated Condensed Financial
Statements). While API expense is expected to be reduced in future periods
because of reductions recorded in the value of existing identified intangible
assets and goodwill in 2001, it could increase in the future, because of new
acquisitions.
Acquired In-process Research and Development. In 2001, we recorded charges
of $393.2 million or 12 percent of net sales for acquired in-process research
and development ("IPR&D") resulting from the acquisitions of SDL ($380.7
million), OPA ($3.0 million), Iridian ($0.6 million), and Epion ($8.9 million).
In 2000, we recorded charges of $360.7 million or 25 percent of net sales for
IPR&D resulting from the acquisitions of EPITAXX ($16.7 million), SIFAM ($3.0
million), OCLI ($84.1 million), Cronos ($6.3 million) and E-TEK ($250.6
million). In 1999, we recorded $210.4 million or 74 percent of net sales of
IPR&D resulting from the former Uniphase Corporation's merger with JDS FITEL
(see Note 10 of Notes to Consolidated Financial Statements). These amounts were
expensed on the acquisition dates because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. There can
be no assurance that acquisitions of businesses, products or technologies by us
in the future will not result in substantial charges for IPR&D that may cause
fluctuations in our quarterly or annual operating results.
A description of the acquired in-process technology, stage of development,
estimated completion costs, and time to complete at the date of the merger for
our significant 2001 acquisitions, as well as the current status of acquired
in-process research and development projects for each acquisition can be found
at the end of this Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Special Charges. During the second half of the 1990s through calendar
2000, the fiber optic communications industry experienced a period of
considerable growth, and we participated in that growth as a leading supplier to
these markets. This growth was attributable primarily to: (a) the introduction
of wavelength division multiplexing (WDM) technology (under which multiple light
signals are transmitted down a single optical fiber cable), which allowed the
expansion of fiber optic network capacity without the expense and time required
to install additional fiber cable; (b) the unprecedented growth during this
period in data traffic, in general, and the internet, in particular, which
created rapidly increasing demand for larger, faster and more robust networks
(commonly collectively referred to loosely as "bandwidth"); (c) the
Telecommunications Act of 1996, which sought to open existing proprietary
telecommunications infrastructures to multiple carriers, and, as a consequence,
created a market for new upstart telecommunications carriers (called competitive
local exchange carriers, or CLECs), each of which moved rapidly to deploy its
own network; and (d) an abundance of relatively low cost capital available for
network development and expansion. Together, these factors fueled a rapid and
substantial installation of fiber optic networks in anticipation of rapidly
growing bandwidth demand and future sales. As a result of the demand placed on
our system provider customers by established and emerging telecommunications
carriers, we faced mounting, unrelenting, demand for our products during this
period. In response, we focused much of our efforts on expanding our business,
internally and through
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acquisitions, to meet the increasingly urgent needs of our customers for
increased product breadth and manufacturing capacity. As a result of these
efforts, our quarterly sales grew rapidly, for example increasing from $87
million for the fourth quarter of 1999 to $925 million for the second quarter of
2001.
Since the beginning of calendar 2001, we and our industry have experienced
a dramatic downturn, the primary direct cause of which has been a precipitous
decrease in network deployment and capital spending by telecommunications
carriers. This decrease can be attributable to, among other things: (a) network
overcapacity, as bandwidth demand, while continuing to grow, did not reach
levels sufficient to sustain the pace of network deployment; (b) constrained
capital markets; and (c) other factors, including the general inability of the
CLECs to obtain sufficient access to established telecommunications
infrastructures and consolidation among the telecommunications carriers. The
result was a decrease in the overall demand for new fiber optic networks and
capacity increases on existing networks. In response, carriers dramatically
slowed their purchases of systems from our customers, which in turned slowed
purchases of components and modules from our competitors and us. Moreover, as
their sales declined, our customers moved to reduce their component and module
inventory levels. Consequently, the impact of the slowdown on our business is
magnified, as we face declining sales as the result of our customers' declining
business and the resulting adjustment to their inventory levels.
In April 2001, we initiated the Global Realignment Program, under which we
are restructuring our business in response to the changes in our industry and
customer demand and as part of our continuing overall integration program.
During the fourth quarter of 2001 in connection with the Program, we recorded
$264.3 million of restructuring charges, and $236.6 million of inventory
write-downs associated with discontinued products. In addition, we also recorded
additional $274.0 million and $59.8 million related to further inventory write
downs and loss on excess inventory commitments associated with reduced customer
demand for our product.
On April 24, 2001, we announced that we were evaluating the value of
certain long-lived assets and that such evaluation may result in an
approximately $40 billion reduction in goodwill for the quarter ended March 31,
2001. On July 26, 2001, we announced that we were recording reductions of $38.7
billion and $6.1 billion in goodwill and other intangible assets for the
quarters ended March 31, 2001 and June 30, 2001, respectively. We further
announced at that time that we would be conducting a further assessment of our
long-lived assets and that further adjustments to fiscal 2001 results may result
from this assessment. We subsequently completed this review and it resulted in
us recording additional charges to reduce goodwill and other long-lived assets
of $1.1 billion and $4.2 billion during the quarters ended March 31, 2001 and
June 30, 2001, respectively.
The following table and paragraphs describe the nature of the special
charges.
<Table>
<Caption>
YEAR ENDED PROVISION
JUNE 30, CASH NON-CASH BALANCE AS OF
2001 PAYMENTS CHARGES JUNE 30, 2001
---------- -------- ---------- -------------
Restructuring activities:
Worldwide workforce reduction................ $ 79.1 $(24.9) $ (11.1) $ 43.1
Facilities and equipment..................... 122.2 -- (122.2) --
Lease commitments............................ 63.0 (0.9) -- 62.1
--------- ------ ---------- ------
Restructuring charges.......................... 264.3 (25.8) (133.3) 105.2
Reduction of goodwill and other long-lived
assets....................................... 50,085.0 -- (50,085.0) --
--------- ------ ---------- ------
Special charges................................ $50,349.3 $(25.8) $(50,218.3) $105.2
</Table>
RESTRUCTURING ACTIVITIES
The Global Realignment Program (the "Program") is intended to align our
resources and operations into a global structure that is competitive now and
positions us to remain competitive in the future. The Program includes
restructuring certain business functions including a worldwide workforce
reduction and consolidation of excess facilities and equipment.
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As of June 30, 2001 we have completed and approved plans to close nine
operations located in North America, Europe and Asia, vacate approximately 25
buildings or 1.2 million square feet of manufacturing and office space at
operations to be closed, as well as at continuing operations, and reduce our
workforce by approximately 9,000 employees.
During the fourth quarter of 2001, in connection with these plans, we
recorded restructuring charges of $264.3 million as part of the Program. The
following paragraphs provide detailed information related to the restructuring
charges and reduction in goodwill and other long-lived assets recorded in the
fourth quarter of 2001.
WORLDWIDE WORKFORCE REDUCTION
As of June 30, 2001, we had recorded a charge of approximately $79.1
million primarily related to severance and fringe benefits associated with the
reduction of 9,000 employees. Of the 9,000 terminations for which costs have
been accrued as at June 30, 2001, approximately 8,200 were engaged in
manufacturing activities and approximately 7,100, 1,200, and 700 were from sites
located in North America, Europe and Asia, respectively. As of June 30, 2001,
approximately 6,100 employees had been terminated. The workforce reductions
began in the fourth quarter of 2001 and we expect them to be completed by the
second quarter of 2002. In addition, we incurred non-cash severance charges of
$11.1 million related to the modification of a former executive's stock options
(see Note 9 of Notes to Consolidated Financial Statements).
Prior to the date of the financial statements, management with the
appropriate level of authority, approved and committed us to a plan of
termination which included the benefits terminated employees would receive.
Prior to June 30, 2001, the expected termination benefits were communicated to
employees in detail sufficient to enable them to determine the nature and
amounts of their individual severance benefits.
Remaining cash expenditures relating to workforce reductions and
termination agreements will be paid throughout the first and second quarters of
2002.
CONSOLIDATION OF EXCESS FACILITIES AND EQUIPMENT
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations being closed as of
June 30, 2001 are in Asheville, North Carolina; Bracknell, United Kingdom;
Freehold, New Jersey; Hillend, United Kingdom; Oxford, United Kingdom;
Richardson, Texas; Rochester, New York; Shunde, China and Taipei, Taiwan.
Property and equipment that was disposed or removed from operations
resulted in a charge of $122.2 million and consisted primarily of leasehold
improvements, computer equipment and related software, production and
engineering equipment, and office equipment, furniture, and fixtures. We will
also incur higher depreciation costs totaling approximately $35.1 million in the
first three quarters of 2002 due to shorter estimated useful lives of certain
assets that are being phased out as part of the Program. In addition, we
incurred a charge of $63.0 million for exiting and terminating leases primarily
related to excess or closed facilities with planned exit dates. We estimated the
cost of exiting and terminating the facility leases based on the contractual
terms of the agreements and then current real estate market conditions. We
determined that it would take approximately six to twenty-four months to
sublease the various properties that will be vacated in connection with the
Program.
Amounts related to the lease expense (net of anticipated sublease proceeds)
related to the consolidation of facilities will be paid over the respective
lease terms through 2015. We anticipate completing implementation of our
restructuring program during the next twelve months.
In addition, because we restructured certain of our businesses and
realigned our operations to focus on profit contribution, high growth markets,
and core opportunities as of June 30, 2001, we abandoned certain redundant
products and product platforms and reduced the workforce that had been valued in
previous acquisitions. In accordance with SFAS 121, we wrote the related
intangible assets down to their fair value,
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which was deemed to be zero, and recorded a charge of $0.3 billion related to
the reduction in purchased intangibles and $3.1 billion related to goodwill
associated with these assets.
IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
As part of our review of financial results for 2001, we also performed an
assessment of the carrying value of the our long-lived assets to be held for use
including significant amounts of goodwill and other intangible assets recorded
in connection with our various acquisitions. The assessment was performed
pursuant to SFAS 121 because of the significant negative industry and economic
trends affecting both our current operations and expected future sales as well
as the general decline of technology valuations. The conclusion of that
assessment was that the decline in market conditions within our industry was
significant and other than temporary. As a result, we recorded charges of $39.8
billion and $6.9 billion to reduce goodwill and other long-lived assets during
the third and fourth quarters of 2001, respectively, based on the amount by
which the carrying amount of these assets exceeded their fair value. Of the
total write down, $46.6 billion is related to the goodwill primarily associated
with the acquisitions of E-TEK, SDL, and OCLI with the balance of $0.1 billion
relating to other long-lived assets. Fair value was determined based on
discounted future cash flows for the operating entities that had separately
identifiable cash flows. The cash flow periods used were five years using annual
growth rates of 15 percent to 60 percent, the discount rate used was 13.0
percent in the third quarter of 2001 and 14.5 percent in the fourth quarter of
2001, and the terminal values were estimated based upon terminal growth rates of
7 percent. The assumptions supporting the estimated future cash flows, including
the discount rate and estimated terminal values, reflect management's best
estimates. The discount rate was based upon our weighted average cost of capital
as adjusted for the risks associated with our operations.
It is reasonably possible that the estimates and assumptions used under our
SFAS 121 assessment may change in the near term resulting in the need to further
write-down our goodwill and other long-lived assets. In addition, it is
reasonably possible we may incur additional reductions in goodwill if our market
capitalization is less than our net assets in future periods.
INVENTORY WRITE-DOWN AND LOSS ON PURCHASE COMMITMENTS NOT INCLUDED IN
RESTRUCTURING CHARGES
We recorded a loss on purchase commitments of $59.8 million and inventory
write-down of $510.6 million during the fourth quarter of 2001. These additional
charges to cost of sales were due to (i) a sudden and significant decrease in
forecasted sales in the fourth quarter of 2001 and were calculated based on
inventory levels and purchase commitments in excess of expected demand for each
specific product and (ii) product consolidations and discontinuations in
connection with the Program.
Gain on Sale of Subsidiary. On February 13, 2001, we completed the sale of
our Zurich, Switzerland subsidiary to Nortel Networks ("Nortel") for 65.7
million shares of Nortel common stock valued at $1,953.3 million. After
adjusting for the net costs of the assets sold and for the expenses associated
with the divestiture, we realized a gain of $1,770.2 million.
Activity Related to Equity Investments. For 2001, activity related to
equity investments was a net loss of $883.9 million. This includes: (i) a $744.7
million charge to earnings to write down the carrying value of our investment in
ADVA due to an other than temporary decline in its fair value, (ii) $136.2
million of amortization expense related to the difference between the cost of
the investment and the underlying equity in the net assets of ADVA at the date
of acquisition; and (iii) $3.0 million related to our share of the net income of
the Photonics Fund and net loss of ADVA.
Loss on Sale of Available-for-Sale Investments. During 2001, we sold
approximately 41.0 million shares of Nortel common stock resulting in a realized
loss of $559.1 million.
Reduction in fair value of Available-for-Sale Investments. At June 30,
2001, we had 24.7 million shares of Nortel common stock at a fair value of
$223.1 million. We recognized a reduction in fair value of $511.8 million
associated with the 24.7 million shares held by us as of June 30, 2001, as we
determined the decline in the fair value of the shares of Nortel common stock to
be other-than-temporary. In addition, we
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recorded a charge of $10.3 million in connection with another of our
available-for-sale investments related to an other-than-temporary decline in
fair value.
Should the Company decide to sell the shares of Nortel common stock or
should the fair value of the shares of Nortel common stock held by the Company
continue to decline in the near future, the Company may record additional losses
related to these shares.
Interest and Other Income, net. Net interest and other income of $48.5
million for 2001 represented an increase of $13.2 million from 2000 income of
$35.3 million, which represented an increase of $31.7 million from 1999 income
of $3.6 million. In 2001, The increase in interest and other income was the
result of higher investment balances obtained through cash generated from
operating activities, our acquisition of E-TEK and proceeds from the issuance of
common stock under our stock option and stock purchase plans. In 2000, the
increase in interest and other income was the result of higher investment
balances obtained through cash generated from operating activities, our mergers
with JDS FITEL and OCLI, and the completion of a public offering of our common
stock and a private placement of exchangeable shares in August 1999 that
generated $713.6 million in cash, net of transaction costs.
Income Tax Expense. We recorded a $371.9 million benefit for income taxes
for 2001 and income tax expense of $74.9 million, and $21.5 million for 2000 and
1999, respectively. The expected tax benefit derived by applying the federal
statutory rate to the operating losses each year differs from the amount
recorded primarily due to non-deductible acquisition related charges.
We have a $996.0 million valuation allowance for deferred tax assets at
June 30, 2001. The valuation allowance for deferred tax assets reduces the net
deferred tax assets to $411.1 million, an amount management believes is more
likely than not realizable. Approximately $81 million of the net deferred tax
assets are supported by foreign recoverable income taxes. Realization of the
remaining $330.1 million of net deferred tax assets is based on our projections
of future domestic taxable income. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimate of
future domestic taxable income is reduced.
Approximately $663.0 million of the deferred tax assets subject to the
valuation allowance are attributable to stock options that will be credited to
paid in capital when realized. Deferred tax assets of approximately $192.6
million attributable to acquisition related items that are subject to the
valuation allowance will, when realized, first reduce unamortized goodwill, then
other non-current intangible assets of acquired subsidiaries, and then income
tax expense.
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RESULTS OF OPERATIONS -- PRO FORMA
The following supplemental table compares actual results of operations of
JDS Uniphase for 2000 with pro forma results of operations of the former
Uniphase Corporation and JDS FITEL combined for 1999 (in millions).
<Table>
<Caption>
PRO FORMA
RESULTS OF
AS REPORTED OPERATIONS AS REPORTED
GAAP UNIPHASE AND GAAP
RESULTS JDS FITEL RESULTS
OF OPERATIONS COMBINED OF OPERATIONS
------------- ------------ -------------
JUNE 30,
--------------------------------------------
2000 1999 1999
------------- ------------ -------------
Net sales............................................... $1,430.4 $ 587.9 $ 282.8
Cost of sales........................................... 751.6 284.4 138.7
-------- -------- -------
Gross profit.......................................... 678.8 303.5 144.1
Operating expenses:
Research and development.............................. 113.4 52.5 27.0
Selling, general and administrative................... 172.9 71.5 37.4
Amortization of purchased intangibles................. 896.9 687.5 15.7
Acquired in-process research and development.......... 360.7 210.4 210.4
Merger and other costs................................ -- 6.8 6.8
-------- -------- -------
Total operating expenses................................ 1,543.9 1,028.7 297.3
-------- -------- -------
Loss from operations.................................... (865.1) (725.2) (153.2)
Interest and other income, net........................ 35.3 10.4 3.6
-------- -------- -------
Loss before income taxes................................ (829.8) (714.8) (149.6)
Income tax expense.................................... 74.9 (2.5) 21.5
-------- -------- -------
Net loss................................................ $ (904.7) $ (712.3) $(171.1)
======== ======== =======
</Table>
YEARS ENDED JUNE 30, 2000 AND 1999
Net Sales. Net sales of $1,430.4 million for 2000 represented an increase
of $842.5 million or 143 percent over pro forma 1999 net sales of $587.9
million. The increase from 1999 to 2000 reflected $648.9 or 330 percent growth
in our existing products on a pro forma basis. Growth was driven by customer
demands for higher channel count systems to meet increased bandwidth
requirements. The additional increase in 2000 reflected the impact of $193.6
million net sales from companies we acquired in 2000 (see Note 10 of Notes to
Consolidated Financial Statements).
Gross Margin. Gross margin of $678.8 million, or 47 percent of net sales
for 2000 represents an increase of $375.3 million or 124 percent over 1999 pro
forma gross margin of $303.5 million, or 52 percent of pro forma net sales.
Strong demand for virtually all our optical components and modules products
combined with $83.3 million gross profits from companies we acquired in 2000
contributed to the increases. The decline in the pro forma gross margin from
1999 to 2000 reflects the impact of $25.3 million in purchase accounting
adjustments that increased JDS FITEL, EPITAXX, SIFAM, OCLI and Cronos
inventories. These adjustments flowed through to cost of sales during the year.
Gross margin was also reduced by $22.6 million in adjustments related to the
E-TEK acquisition, which decreased E-TEK net inventory and flowed through to
cost of sales upon completion of our acquisition of E-TEK. Excluding the impact
of above described acquisition related adjustments, gross profit declined from
52 percent in 1999 to 51 percent in 2000. The decrease reflects 15 percent to 20
percent reductions in average selling prices, which were largely offset by
reductions in manufacturing costs through automation, yield improvements and
other improvements in the manufacturing processes.
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Research and Development Expense. R&D expense of $113.4 million or 8
percent of net sales represented an increase of $60.9 million or 116 percent
over pro forma 1999 expense of $52.5 million or 9 percent of pro forma net
sales. The increase in R&D expenses is primarily due to increased personnel
costs and other expenses related to the development of new products and
technologies, and the continued development and enhancement of existing products
and the inclusion of our acquisitions during 2000 from the date of acquisition.
Selling, General and Administrative Expense. Selling, general and
administrative expense (SG&A) of $172.9 million or 12 percent of net sales
represented an increase of $101.4 million or 142 percent over pro forma 1999
expense of $71.5 million or 12 percent of net sales. The increase in 2000 is
primarily a result of higher SG&A costs due to the hiring of additional
administrative personnel and inclusion of our 2000 acquisitions expenses
subsequent to the date of acquisition. As a percentage of net sales, SG&A for
2000 was consistent with pro forma 1999 SG&A.
Amortization of Purchased Intangibles. Since 1995, we have entered into
several mergers and acquisitions that generated approximately $23.3 billion in
identified intangibles (primarily developed technology) and goodwill. In 2000,
API was $896.9 million or 63 percent of net sales, which represented an increase
of $209.4 million or 30 percent over pro forma 1999 API of $687.5 million or 117
percent of net sales. The pro forma 1999 API is calculated as the 12 months
amortization expense for JDS FITEL, which would have been incurred in 1999
assuming that the merger between Uniphase and JDS FITEL was completed on July 1,
1998. The increase in API in 2000, is primarily due to the intangible assets
generated from the acquisitions of AFC, Ramar, EPITAXX, SIFAM, Oprel, IOT, OCLI,
Cronos, and Casix during 2000 (see Note 10 of Notes to Consolidated Financial
Statements).
Acquired In-Process Research and Development. In 2000, we recorded charges
of $360.7 million or 25 percent of net sales for acquired in-process research
and development resulting from the acquisitions of EPITAXX ($16.7 million),
SIFAM ($3.0 million), OCLI ($84.1 million), Cronos ($6.3 million) and E-TEK
($250.6 million). In 1999, we recorded $210.4 million or 36 percent of pro forma
net sales of acquired in-process research and development resulting from the
former Uniphase Corporation's merger with JDS FITEL (See Note 10 of Notes to
Consolidated Financial Statements). These amounts were expensed on the
acquisition dates because the acquired technology had not yet reached
technological feasibility and had no future alternative uses. There can be no
assurance that acquisitions of businesses, products or technologies by us in the
future will not result in substantial charges for acquired in-process research
and development that may cause fluctuations in our quarterly or annual operating
results.
Interest and Other Income. Net interest and other income of $35.3 million
for 2000 represented an increase of $24.9 million from pro forma 1999 income of
$10.4 million. The increase in interest and other income was the result of
higher investment balances obtained through cash generated from operating
activities, our acquisition of OCLI and the completion of a public offering of
our common stock and a private placement of Exchangeable shares in August 1999
that generated $713.6 million in cash, net of transaction costs.
OPERATING SEGMENT INFORMATION -- ACTUAL
Amplification and Transmission Group. Net sales for the Amplification and
Transmission Group increased 91 percent in 2001 compared to 2000. The increase
in net sales for the Amplification and Transmission Group was primarily due to
higher unit sales volume of optical receivers, transmitters, modulators and pump
lasers, and the acquisitions of SDL and Epitaxx. Operating income as a
percentage of net sales decreased to 12 percent of net sales in 2001 compared to
26 percent in 2000. The decrease in operating income as a percentage of net
sales was due to inventory write-downs due to lower sales estimates for future
periods and charges related to our restructuring activities.
WDM, Switching and Thin Film Filters. Net sales for the WDM, Switching and
Thin Film Filters Group increased 153 percent in 2001 compared to 2000. The
increase in net sales for the WDM, Switching and Thin Film Filters Group was
primarily due to the acquisitions of E-TEK and OCLI and higher unit sales volume
in wavelength division multiplexers ("WDM"), instruments and waveguides.
Operating income as a
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percentage of net sales decreased to 10 percent of net sales in 2001 compared to
37 percent in 2000. The decrease in operating income as a percentage of net
sales was due to inventory write-downs due to lower sales estimates for future
periods and charges related to our restructuring activities.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, our combined balance of cash, cash equivalents and
short-term investments was $1,812.2 million. For the year, we met our liquidity
needs through cash generated from operating activities. Excluding the impact of
indirect acquisition costs of $300.9 million paid to certain SDL executives in
connection with the acquisition of SDL during 2001, net cash provided by
operating activities was $354.1 million in 2001, compared with $281.1 million
and $67.0 million in 2000 and 1999, respectively.
Excluding the impact of indirect acquisition costs of $300.9 million paid
to certain SDL executives in connection with the acquisition of SDL, operating
activities generated $354.1 million during 2001 primarily resulting from the
following: (i) earnings before non-cash accounting charges for depreciation,
IPR&D, loss on sale of investments, loss on disposal of fixed assets, stock
based compensation, write-off of goodwill and purchased intangibles, activity
related to equity interests in equity investments, and amortization of
intangibles, (ii) increases in accrued liabilities as a result of the
restructuring liability established in the fourth quarter of 2001, and (iii) tax
benefit from employee stock options. These items were partially offset by a net
increase in deferred tax assets of $598.3 million, decrease in taxes payable,
and the gain on the divestiture of the Zurich subsidiary. Increases to accounts
receivable, inventories and other working capital attributable to our
acquisitions are excluded from operating cash flow as the acquisition of these
balances is not a result of operations (see Note 10 of Notes to Consolidated
Financial Statements).
Cash used in investing activities was $0.5 million in 2001 compared with
$819.6 million and $40.3 million for 2000 and 1999, respectively. During 2001,
we incurred capital expenditures of $732.5 million for facilities expansion and
capital equipment purchases to expand our manufacturing capacity for our
telecommunications products and installation of a new enterprise resource
planning system. We currently expect to spend approximately $230 million for
capital equipment purchases and leasehold improvements during 2002. During 2001,
we sold net short-term and long-term investments of $570.4 million. In addition,
we acquired Epion, OPA, and SDL during 2001 and these acquisitions provided an
additional $175.7 million of cash.
We generated $391.1 million, $782.1 million, and $15.4 million in cash from
financing activities in 2001, 2000, and 1999, respectively. In 2001, we
generated $417.7 million from the exercise of stock options and the sale of
stock through our employee stock purchase plan and used $26.6 million to repay a
portion of the debt assumed from our acquisitions.
We believe that our existing cash balances and investments, together with
cash flow from operations will be sufficient to meet our liquidity and capital
spending requirements at least through the end of 2002. However, possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There can be
no assurance that additional debt or equity financing will be available when
required or, if available, can be secured on terms satisfactory to us.
At June 30, 2001, we had two standby letter of credit facilities totaling
approximately $11.0 million. We also had an unsecured operating bank line of
credit for $25.0 million. Advances under the line of credit bear interest at the
Canadian Prime Rate of 6.25 percent at June 30, 2001. We had no outstanding
borrowings under this facility at June 30, 2001.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS
SDL
An independent valuation specialist performed an allocation under our
direction of the total purchase price of SDL to its individual assets. Of the
total purchase price, $380.7 million has been allocated to IPR&D and was charged
to expense for the three months ended March 31, 2001. The remaining purchase
price has been allocated specifically to identifiable assets acquired.
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After allocating value to the IPR&D projects and SDL tangible assets,
specific intangible assets were then identified and valued. The identifiable
intangible assets include existing technology, core technology, trademarks and
tradename, and assembled workforce.
The IPR&D is comprised of five main categories: (1) pump laser chips; (2)
pump laser modules; (3) Raman chips and amplifiers; (4) external modulators and
drivers; and (5) industrial laser products. The following is a brief description
of each IPR&D project as of the date of the acquisition:
Pump Laser Chips. SDL supplies high power 980-nm pump laser chips to
provide power to optical amplifiers used in fiber optic systems. SDL pump laser
chip development efforts support future generation optical amplifiers. SDL
completed the development cycles for the current research and development
project with respect to these products in the second quarter of the calendar
year 2001.
Pump Laser Modules. SDL supplies 980-nm pump laser modules that lead the
industry in output power and performance. SDL expects the development cycle for
the current research and development project with respect to these pump laser
modules to continue for another four months, with expected completion dates in
the fourth quarter of calendar year 2001.
Raman Chips and Amplifiers. SDL is engaged in the development of Raman
chips and amplifiers, which are an emerging technology in fiber optic
transmissions systems. Raman amplifiers differ from conventional EDFAs in that
they use installed optical fiber as the amplification medium rather than erbium-
doped fiber. SDL expects the development cycle for the current research and
development project with respect to these Raman chips and amplifiers to continue
for another three months, with expected completion dates in the fourth quarter
of calendar year 2001.
External Modulators and Drivers. SDL supplies external modulators that are
utilized in very high channel count systems with very long propagation
distances.
Industrial Laser Products. SDL supplies products for non-communications
applications. These include applications such as printing and materials
processing. SDL expects to complete the development cycle for the current
research and development projects with respect to these industrial products in
the third quarter of calendar year 2001.
Value Assigned to In-Process Research and Development
The value assigned to IPR&D was determined by considering the relative
importance of each project to the overall development plan, estimating costs to
develop the purchased IPR&D into commercially viable products, estimating the
resulting net cash flows from the projects when completed and discounting the
net cash flows to their present value. The sales estimates used to value the
purchased IPR&D were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by SDL and its competitors.
The rates utilized to discount the net cash flows to their present value
are based on SDL's weighted average cost of capital. Given the nature of the
risks associated with the difficulties and uncertainties in completing each
project and thereby achieving technological feasibility, anticipated market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets, the weighted average cost of
capital was adjusted. Based on these factors, discount rates of 12 percent and
20 percent were deemed appropriate for the developed and in-process technology,
respectively. The estimates used in valuing IPR&D were based upon assumptions
believed to be reasonable but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on SDL's financial condition and results of operations.
With respect to the acquired in-process technologies, the calculations of value
were
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45
adjusted to reflect the value creation efforts of SDL prior to the merger.
Following are the estimated completion percentages with respect to the current
research and development efforts and technology lives:
<Table>
<Caption>
EXPECTED
PERCENT TECHNOLOGY
PROJECT COMPLETED LIFE
------- --------- ----------
Pump Laser Chips............................................ 92% 5 years
Pump Laser Modules.......................................... 50% 5 years
Raman Chips and Amplifiers.................................. 64% 5 years
External Modulators and Drivers............................. 31% 5 years
Industrial Laser Products................................... 74% 5 years
</Table>
The value assigned to each acquired IPR&D project was as follows (in
millions):
<Table>
Pump Laser Chips............................................ $140.8
Pump Laser Modules.......................................... 22.7
Raman Chips and Amplifiers.................................. 113.7
External Modulators and Drivers............................. 87.4
Industrial Laser Products................................... 16.1
------
Total acquired in-process research and development.......... $380.7
======
</Table>
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
analysis of data provided by SDL concerning developmental products, their stage
of development, the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPR&D.
Where developmental projects had reached technological feasibility, they
were classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
OPA
An independent appraiser performed an allocation under our direction of the
total purchase price of OPA to its individual assets. Of the total purchase
price, $3.0 million has been allocated to IPR&D and was charged to expense in
the quarter ended March 31, 2001. The remaining purchase price has been
allocated specifically to identifiable assets acquired. The product under
development at the time of acquisition was OptoMate that is an automated and
semi-automated system for the manufacture of fiberoptic components and modules.
EPION
An independent appraiser performed an allocation under our direction of the
total purchase price of Epion to its individual assets. Of the total purchase
price, $8.9 million has been allocated to IPR&D and was charged to expense in
the quarter ended September 30, 2000. The remaining purchase price has been
allocated specifically to identifiable assets acquired. The products under
development at the time of acquisition included Gas Cluster Ion Beam technology
used for atomic scale surface smoothing and cleaning where surface or film
quality is of great importance.
44
46
CURRENT STATUS OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS
We periodically review the stage of completion and likelihood of success of
each of the IPR&D projects. The current status of the IPR&D projects for all
significant mergers and acquisitions during the past three years are as follows:
SDL
The products under development at the time of acquisition included: (1)
pump laser chips; (2) pump laser modules; (3) Raman chips and amplifiers; (4)
external modulators and drivers; and (5) industrial laser products. The pump
laser chips and industrial laser products have been completed at a cost
consistent with our expectations. The pump laser modules and Raman chips are
expected to be completed by the fourth quarter of calendar 2001. We have
incurred costs of $28.2 million, with estimated costs to complete of $4.9
million. The differences between the actual outcome noted above and the
assumptions used in the original valuation of the technology are not expected to
significantly impact our results of operations and financial position.
EPION
The products under development at the time of acquisition included Gas
Cluster Ion Beam technology used for atomic scale surface smoothing and cleaning
where surface or film quality is of great importance. Epion has incurred $2.4
million to date and estimates that a total investment of approximately $4.5
million in research and development over the next 24 months will be required to
complete the IPR&D. The nature of the efforts required to develop the purchased
IPR&D into commercially viable products principally relate to the completion of
all planning, designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to meet their
design specifications, including functions, features and technical performance
requirements.
E-TEK
The products under development at the time of acquisition included: (1)
wavelength division multiplexers (WDM's); (2) submarine products: and (3) other
component products and modules. The WDM and submarine products have been
completed at a cost consistent with our expectations. Our development efforts
for other components and modules include attenuators, circulators, switches,
dispersion equalization monitors and optical performance monitors. Our
development efforts are behind schedule on some of these products, with
estimated completion dates in the third quarter of calendar 2002. The costs
incurred to date are approximately $6.2 million, with estimated costs to
complete of $0.9 million. The differences between the actual outcome noted above
and the assumptions used in the original valuation of the technology are not
expected to significantly impact our results of operations and financial
position.
CRONOS
The products under development at the time of acquisition included: (1) RF
microrelays; (2) variable optical attenuators; and (3) active fiber aligners.
The microrelays development and the variable optical attenuators project are
substantially complete at a cost consistent with our expectations. The active
fiber aligner development project is currently being evaluated relative to
similar efforts already underway within the Company.
OCLI
The products under development at the time of the acquisition included: (1)
thin film filters and switches, (2) optical display and projection products, and
(3) light interference pigments. Thin film filters includes switches and
dispersion compensators. The MEMS 2x2 Switch development has been terminated at
OCLI and transferred over to JDS FITEL beginning in the first quarter of
calendar year 2002. Dispersion compensators and other switches, are currently in
the exploratory and prototype development stages of the development cycle. The
expected development on these products is between 3 and 12 months. We have
45
47
incurred post acquisition costs of approximately $4.9 million with an estimated
cost to complete the remaining projects of $1.4 million, which we expect to
incur ratably for the remainder of the development cycle.
The optical display and projection products development has been terminated
due to the uncertainty of current market conditions. Light interference pigments
are currently in the commercial stage of the development cycle for this product
family and these projects have expected completion dates in the first quarter of
calendar year 2002. We have incurred post-acquisition research and development
expenses of approximately $15.6 million and estimates that cost to complete
these projects will be another $1.0 million which we expect to incur ratably
over the remainder of the product development cycle.
SIFAM
The products under development at the time of the acquisition included: (1)
miniature couplers; (2) combined components; and (3) micro-optic devices.
Miniature coupler development and combined components development are complete
at a cost consistent with our expectations. Micro-optic device development is
currently being evaluated relative to similar efforts already underway within
the Company. The costs incurred post acquisition for micro-optic device
development has been consistent with our expectations.
EPITAXX
The products under development at the time of the acquisition included (1)
high-speed receivers, and (2) an optical spectrum analyzer product. The
high-speed receiver and optical spectrum analyzer have been completed at costs
consistent with our expectations.
JDS FITEL
The products under development at the time of our merger included: (i)
Thermo Optic Waveguide Attenuators, (ii) Solid State Switch, (iii) 50 GHz WDM,
and (iv) Erbium Doped Fiber Amplifiers ("EDFA"). Thermo Optic Waveguide
Attenuator development was discontinued in the first quarter of 2001, due to
lower than expected demand for this product, and higher demand for other
products. Solid State Switch, WDM and EDFA developments are complete at a cost
consistent with our expectations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We maintain an investment portfolio of various holdings, types, and
maturities. These securities are generally classified as available for sale and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of other comprehensive income.
Part of this portfolio includes minority equity investments in several publicly
traded companies, the values of which are subject to market price volatility. We
also have certain real estate lease commitments with payments tied to short-term
interest rates. At any time, a sharp rise in interest rates could have a
material adverse impact on the fair value of our investment portfolio while
increasing the costs associated with our lease commitments. Conversely, declines
in interest rates could have a material impact on interest earnings for our
investment portfolio. We do not currently hedge these interest rate exposures.
INVESTMENTS
The following tables present the hypothetical changes in fair value in the
financial instruments held at June 30, 2001 and June 30, 2000 that are sensitive
to changes in interest rates. These instruments are not leveraged and are held
for purposes other than trading. The modeling technique used measures the change
in fair values arising from selected potential changes in interest rates. Market
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS over a 12-month
horizon. Beginning fair values represent the principal plus accrued interest and
dividends at
46
48
June 30, 2001 and June 30, 2000. The following tables estimate the fair value of
the portfolio at a 12-month horizon (in millions):
<Table>
<Caption>
VALUATION OF SECURITIES GIVEN AN
VALUATION OF SECURITIES GIVEN AN INTEREST RATE FAIR VALUE INTEREST RATE INCREASE OF X BASIS
DECREASE OF X BASIS POINTS AS OF POINTS
----------------------------------------------- JUNE 30, -----------------------------------
ISSUER (150 BPS) (100 BPS) (50 BPS) 2001 50 BPS 100 BPS 150 BPS
------ -------------- -------------- ------------- ---------- --------- ---------- ----------
U.S. Treasuries & agencies
notes...................... 51 50 50 50 49 49 48
State, municipal, and county
government notes and
bonds...................... 704 701 698 695 693 690 687
Corporate notes and bonds.... 68 67 67 67 66 66 65
Money market fund............ 732 732 732 732 732 732 732
----- ----- ----- ----- ----- ----- -----
Total...................... 1,555 1,550 1,547 1,544 1,540 1,537 1,532
===== ===== ===== ===== ===== ===== =====
</Table>
<Table>
<Caption>
VALUATION OF SECURITIES GIVEN AN
VALUATION OF SECURITIES GIVEN AN INTEREST RATE FAIR VALUE INTEREST RATE INCREASE OF X BASIS
DECREASE OF X BASIS POINTS AS OF POINTS
----------------------------------------------- JUNE 30, -----------------------------------
ISSUER (150 BPS) (100 BPS) (50 BPS) 2000 50 BPS 100 BPS 150 BPS
------ -------------- -------------- ------------- ---------- --------- ---------- ----------
U.S. Treasuries & agencies
notes...................... 25 25 25 25 25 25 25
State, municipal, and county
government notes and
bonds...................... 602 599 596 593 590 587 584
Corporate notes and bonds.... 42 42 42 42 42 41 41
Money market fund............ 164 164 164 164 164 164 164
--- --- --- --- --- --- ---
Total...................... 833 830 827 824 821 817 814
=== === === === === === ===
</Table>
A 50 BPS move in the Federal Funds Rate has occurred in 6 of the last 10
years; a 100 BPS move in the Federal Funds Rate has occurred in 4 of the last 10
years; and a 150 BPS move in the Federal Funds Rate has occurred in 2 of the
last 10 years.
The following analyses present the hypothetical changes in fair values of
public equity investments that are sensitive to changes in global equity
markets. These equity securities are held for purposes other than trading. The
modeling technique used measures the hypothetical change in fair values arising
from selected hypothetical changes in each stock's price. Stock price
fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus 50% were
selected.
The following tables estimate the fair value of the publicly traded
corporate equities at a 12-month horizon (in millions):
<Table>
<Caption>
VALUATION OF SECURITIES VALUATION OF SECURITIES
GIVEN X% DECREASE FAIR VALUE GIVEN X% INCREASE
IN EACH STOCK'S PRICE AS OF IN EACH STOCK'S PRICE
------------------------ JUNE 30, -----------------------
50% 35% 15% 2001 15% 35% 50%
------ ------ ------ ---------- ----- ----- -------
Corporate equities..................... $139 $181 $236 $278 $320 $375 $ 417
</Table>
<Table>
<Caption>
VALUATION OF SECURITIES VALUATION OF SECURITIES
GIVEN X% DECREASE FAIR VALUE GIVEN X% INCREASE
IN EACH STOCK'S PRICE AS OF IN EACH STOCK'S PRICE
------------------------ JUNE 30, -----------------------
50% 35% 15% 2001 15% 35% 50%
------ ------ ------ ---------- ----- ----- -------
Corporate equities..................... $359 $467 $610 $718 $826 $969 $1,077
</Table>
LEASES
We are exposed to interest rate risk associated with leases on our
facilities where payments are tied to the London Interbank Offered Rate
("LIBOR"). We have evaluated the hypothetical change in lease obligations held
at June 30, 2001 due to changes in the LIBOR. The modeling technique used
measures hypothetical changes in lease obligations arising from selected
hypothetical changes in LIBOR. The hypothetical market changes reflected
immediate parallel shifts in the LIBOR curve of plus or minus 50 BPS, 100 BPS,
and 150
47
49
BPS over a 12-month period. The results of this analysis were not material in
comparison to our financial results.
FOREIGN EXCHANGE FORWARD CONTRACTS
We generate a significant portion of our sales from sales to customers
located outside the United States, principally in Europe. International sales
are made mostly from our foreign subsidiaries in the local countries and are
typically denominated in either U.S. dollars or the local currency of each
country. These subsidiaries also incur most of their expenses in the local
currency. Accordingly, all foreign subsidiaries use the local currency as their
functional currency.
Our international business is subject to risks typical of an international
business including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
We enter into foreign exchange forward contracts to offset the impact of
currency fluctuations on certain nonfunctional currency assets and liabilities,
primarily denominated in the Australian dollar, Canadian dollar, Euro and
British pound.
The foreign exchange forward contracts we enter into generally have
original maturities ranging from one to three months. We do not enter into
foreign exchange forward contracts for trading purposes. We do not expect gains
or losses on these contracts to have a material impact on our financial results.
48
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
JDS Uniphase Corporation
We have audited the accompanying consolidated balance sheets of JDS
Uniphase Corporation as of June 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2001. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of JDS Uniphase
Corporation at June 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
San Jose, California
September 12, 2001
49
51
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEARS ENDED JUNE 30,
-------------------------------
2001 2000 1999
---------- -------- -------
Net sales................................................... $ 3,232.8 $1,430.4 $ 282.8
Cost of sales............................................... 2,306.7 751.6 138.7
---------- -------- -------
Gross profit.............................................. 926.1 678.8 144.1
Operating expenses:
Research and development.................................. 325.9 113.4 27.0
Selling, general and administrative....................... 818.1 172.9 37.4
Amortization of purchased intangibles..................... 5,387.0 896.9 15.7
Acquired in-process research and development.............. 393.2 360.7 210.4
Reduction of goodwill and other long-lived assets......... 50,085.0 -- --
Restructuring charges..................................... 264.3 -- --
Merger and other costs.................................... -- -- 6.8
---------- -------- -------
Total operating expenses.................................... 57,273.5 1,543.9 297.3
---------- -------- -------
Loss from operations........................................ (56,347.4) (865.1) (153.2)
Interest income, net........................................ 48.5 35.3 3.6
Gain on sale of subsidiary.................................. 1,770.2 -- --
Activity related to equity method investments............... (883.9) -- --
Loss on sale of available-for-sale investments.............. (559.1) -- --
Reduction in fair value of available-for-sale investments... (522.1) -- --
---------- -------- -------
Loss before income taxes.................................... (56,493.8) (829.8) (149.6)
Income tax expense (benefit)................................ (371.9) 74.9 21.5
---------- -------- -------
Net loss.................................................... $(56,121.9) $ (904.7) $(171.1)
========== ======== =======
Basic and dilutive loss per share........................... $ (51.40) $ (1.27) $ (0.54)
========== ======== =======
Shares used in per share calculation:
Basic and dilutive........................................ 1,091.9 710.9 318.2
========== ======== =======
</Table>
See accompanying notes to consolidated financial statements.
50
52
JDS UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
JUNE 30,
----------------------
2001 2000
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 762.8 $ 319.0
Short-term investments.................................... 1,049.4 795.3
Accounts receivable, less allowances for doubtful accounts
of $40.3 at June 30, 2001 and $8.2 at June 30, 2000.... 477.6 381.6
Inventories............................................... 287.6 375.4
Refundable income taxes................................... 31.2 8.1
Deferred income taxes..................................... 340.2 62.4
Other current assets...................................... 87.5 31.1
---------- ---------
Total current assets................................... 3,036.3 1,972.9
Property, plant, and equipment, net......................... 1,173.0 670.7
Deferred income taxes....................................... 806.3 642.7
Goodwill and other intangible assets........................ 7,045.6 22,337.8
Long-term investments....................................... 169.0 760.9
Other assets................................................ 15.2 4.1
---------- ---------
Total assets........................................... $ 12,245.4 $26,389.1
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 190.6 $ 195.2
Accrued payroll and related expenses...................... 133.0 98.8
Income taxes payable...................................... 30.6 108.6
Deferred income taxes..................................... 63.0 0.2
Restructuring accrual..................................... 105.2 --
Other current liabilities................................. 326.1 244.4
---------- ---------
Total current liabilities.............................. 848.5 647.2
Deferred income taxes....................................... 672.4 902.1
Other non-current liabilities............................... 5.2 20.2
Long-term debt.............................................. 12.8 41.0
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 1,000,000
Series A: 100,000 shares issued and outstanding at June
30, 2001 and 2000..................................... -- --
Series B: 100,000 shares authorized at June 30, 2001
and 2000.............................................. -- --
Undesignated: 1 voting share authorized, issued and
outstanding........................................... -- --
Common stock, $0.001 par value
Authorized shares -- 3,000,000,000
Issued and outstanding shares -- 1,318,246,161 at June
30, 2001 and 935,928,995 at June 30, 2000............. 1.3 0.9
Common stock to be issued................................. 90.8 --
Additional paid-in capital................................ 68,046.8 25,900.0
Deferred compensation..................................... (183.6) (2.6)
Accumulated deficit....................................... (57,224.4) (1,102.5)
Accumulated other comprehensive loss...................... (24.4) (17.2)
---------- ---------
Total stockholders' equity........................... 10,706.5 24,778.6
---------- ---------
Total liabilities and stockholders' equity........... $ 12,245.4 $26,389.1
========== =========
</Table>
See accompanying notes to consolidated financial statements.
51
53
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK COMMON ADDITIONAL DEFERRED
--------------- ---------------- STOCK TO PAID-IN STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT BE ISSUED CAPITAL COMPENSATION DEFICIT
------ ------ ------- ------ --------- ---------- ------------ -----------
Balance at June 30, 1998.............. 0.1 $-- 311.4 $0.3 $ -- $ 310.8 $ (3.6) $ (26.1)
Shares issued under employee stock
plans and related tax benefits..... -- -- 12.5 -- -- 29.5 -- --
Common stock and options issued in
connection with JDS FITEL merger,
net of issuance costs.............. -- -- 319.5 0.3 -- 3,482.6 -- --
Conversion of debt for common
stock.............................. -- -- 0.3 -- -- 2.4 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- -- 0.5 --
Dividends on BCP stock............... -- -- -- -- -- -- -- (0.6)
Net loss............................. -- -- -- -- -- -- -- (171.1)
Net unrealized gain (loss) on
securities available-for-sale...... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
Comprehensive loss................... -- -- -- -- -- -- -- --
--- --- ------- ---- ----- --------- ------- ----------
Balance at June 30, 1999.............. 0.1 -- 643.7 0.6 -- 3,825.3 (3.1) (197.8)
Shares issued under employee stock
plans and related tax benefits..... -- -- 36.6 -- -- 149.5 -- --
Common stock issued in connection
with offerings..................... -- -- 35.8 0.1 -- 713.5 -- --
in connection with acquisitions.... -- -- 219.8 0.2 -- 21,211.4 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- -- 0.5 --
Conversion of Chassis debt........... -- -- -- -- -- 0.3 -- --
Net loss............................. -- -- -- -- -- -- -- (904.7)
Net unrealized gain (loss) on
securities available-for-sale...... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
Comprehensive loss................... -- -- -- -- -- -- -- --
--- --- ------- ---- ----- --------- ------- ----------
Balance at June 30, 2000.............. 0.1 -- 935.9 0.9 -- 25,900.0 (2.6) (1,102.5)
Shares issued under employee stock
plans and related tax benefits....... -- -- 43.4 0.1 -- 552.4 -- --
Common stock issued in connection
with acquisitions, net of issuance
costs.............................. -- -- 338.9 0.3 -- 41,512.7 -- --
Common stock to be issued............ -- -- -- -- 90.8 -- -- --
Payments on stockholders' note
receivable......................... -- -- -- -- -- 8.1 -- --
Compensation expense related to stock
options............................ -- -- -- -- -- 11.1 -- --
Modification of stock options in
connection with the sale of
subsidiary......................... -- -- -- -- -- 61.2 -- --
Deferred stock based compensation
related to acquisitions............ -- -- -- -- -- -- (233.6) --
Amortization of deferred
compensation....................... -- -- -- -- -- -- 52.6 --
Conversion of Ramar debt............. -- -- 0.1 -- -- 1.3 -- --
Net loss............................. -- -- -- -- -- -- -- (56,121.9)
Net unrealized gain (loss) on
securities available-for-sale, net
of tax............................. -- -- -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
Comprehensive loss................... -- -- -- -- -- -- -- --
--- --- ------- ---- ----- --------- ------- ----------
Balance at June 30, 2001.............. 0.1 $-- 1,318.3 $1.3 $90.8 $68,046.8 $(183.6) $(57,224.4)
=== === ======= ==== ===== ========= ======= ==========
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- ----------
Balance at June 30, 1998.............. $ (1.4) $ 280.0
Shares issued under employee stock
plans and related tax benefits..... -- 29.5
Common stock and options issued in
connection with JDS FITEL merger,
net of issuance costs.............. -- 3,482.9
Conversion of debt for common
stock.............................. -- 2.4
Amortization of deferred
compensation....................... -- 0.5
Dividends on BCP stock............... -- (0.6)
Net loss............................. -- (171.1)
Net unrealized gain (loss) on
securities available-for-sale...... (0.2) (0.2)
Foreign currency translation
adjustment......................... (4.1) (4.1)
----------
Comprehensive loss................... -- (175.4)
------ ----------
Balance at June 30, 1999.............. (5.7) 3,619.3
----------
Shares issued under employee stock
plans and related tax benefits..... -- 149.5
Common stock issued in connection
with offerings..................... -- 713.6
in connection with acquisitions.... -- 21,211.6
Amortization of deferred
compensation....................... -- 0.5
Conversion of Chassis debt........... -- 0.3
Net loss............................. -- (904.7)
Net unrealized gain (loss) on
securities available-for-sale...... (1.8) (1.8)
Foreign currency translation
adjustment......................... (9.7) (9.7)
----------
Comprehensive loss................... -- (916.2)
------ ----------
Balance at June 30, 2000.............. (17.2) 24,778.6
Shares issued under employee stock
plans and related tax benefits....... -- 552.5
Common stock issued in connection
with acquisitions, net of issuance
costs.............................. -- 41,513.0
Common stock to be issued............ -- 90.8
Payments on stockholders' note
receivable......................... -- 8.1
Compensation expense related to stock
options............................ -- 11.1
Modification of stock options in
connection with the sale of
subsidiary......................... -- 61.2
Deferred stock based compensation
related to acquisitions............ -- (233.6)
Amortization of deferred
compensation....................... -- 52.6
Conversion of Ramar debt............. -- 1.3
Net loss............................. -- (56,121.9)
Net unrealized gain (loss) on
securities available-for-sale, net
of tax............................. 7.7 7.7
Foreign currency translation
adjustment......................... (14.9) (14.9)
----------
Comprehensive loss................... -- (56,129.1)
------ ----------
Balance at June 30, 2001.............. $(24.4) $ 10,706.5
====== ==========
</Table>
See accompanying notes to consolidated financial statements.
52
54
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<Table>
<Caption>
YEARS ENDED JUNE 30,
---------------------------------
2001 2000 1999
---------- --------- --------
OPERATING ACTIVITIES
Net loss.................................................. $(56,121.9) $ (904.7) $ (171.1)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation expense.................................... 155.4 52.3 13.9
Amortization expense.................................... 5,387.0 898.4 16.8
Acquired in-process research and development............ 393.2 360.7 210.4
Amortization of deferred compensation................... 52.6 0.5 0.5
Reduction of goodwill and other long-lived assets....... 50,085.0 -- 2.5
Gain on sale of subsidiary.............................. (1,770.2) -- --
Loss on sale of investments............................. 559.1 -- --
Noncash restructuring costs............................. 133.3 -- --
Activity related to equity method investments........... 883.9 -- --
Reduction in fair value of available-for-sale
investments............................................ 522.1 -- --
Tax benefit on non-qualified stock options.............. 142.7 47.8 11.4
Change in deferred income taxes, net.................... (598.3) (78.9) 5.1
Changes in operating assets and liabilities:
Accounts receivable..................................... (21.0) (132.9) (21.5)
Inventories............................................. 190.3 (94.7) (12.1)
Refundable income taxes................................. (23.1) -- (0.4)
Other current assets.................................... (69.3) 5.5 (5.1)
Income taxes payable.................................... (31.3) 18.6 6.2
Accounts payable, accrued liabilities, other current
liabilities and other, net............................. 183.7 108.5 10.4
---------- --------- --------
Net cash provided by operating activities................... 53.2 281.1 67.0
---------- --------- --------
INVESTING ACTIVITIES
Purchase of available-for-sale investments................ (1,523.7) (2,395.9) (204.8)
Sale of available-for-sale investments.................... 2,164.4 1,757.3 176.4
Acquisitions of businesses, net of cash acquired.......... 175.7 99.9 35.0
Purchase of property, plant and equipment and licenses.... (732.5) (280.0) (46.6)
Other assets, net......................................... (14.1) (0.9) (0.3)
Purchase of other investments............................. (70.3) -- --
---------- --------- --------
Net cash used in investing activities....................... (0.5) (819.6) (40.3)
---------- --------- --------
FINANCING ACTIVITIES
Repayment of debt acquired................................ (26.6) (45.1) --
Proceeds from issuance of common stock in a public
offering................................................ -- 713.5 --
Proceeds from issuance of common stock other than in a
public offering......................................... 417.7 113.7 16.0
Pre-merger dividends paid on BCP stock.................... -- -- (0.6)
---------- --------- --------
Net cash provided by financing activities................... 391.1 782.1 15.4
---------- --------- --------
Increase in cash and cash equivalents....................... 443.8 243.6 42.1
Cash and cash equivalents at beginning of period............ 319.0 75.4 33.3
---------- --------- --------
Cash and cash equivalents at end of period.................. $ 762.8 $ 319.0 $ 75.4
========== ========= ========
Supplemental disclosure of cash flow information:
Net cash provided by operating activities excluding
indirect acquisition costs paid to SDL executives....... $ 354.1 $ 281.1 $ 67.0
Cash paid for interest.................................... $ 1.7 $ 3.4 $ --
Cash paid for taxes....................................... $ 154.0 $ 67.9 $ 9.3
Non-cash transactions:
Proceeds from sale of subsidiary.......................... $ 1,953.3 $ -- $ --
Stock issued in connection with acquisitions.............. $ 41,446.2 $21,234.5 $3,482.6
Common stock to be issued in connection with the
acquisition of UNL...................................... $ 90.8 $ -- $ --
</Table>
See accompanying notes to consolidated financial statements.
53
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
JDS Uniphase Corporation (the "Company" or "JDS Uniphase") is a high
technology company that designs, develops, manufactures and distributes fiber
optic components, modules and subsystems for the fiber optic communications
industry. These products are deployed in advanced optical communications
networks for the telecommunications and cable television industries.
Incorporated in Delaware in October 1993, the Company is the product of several
substantial mergers and acquisitions, including, among others, the combination
of Uniphase Corporation and JDS FITEL Inc. to form JDS Uniphase Corporation on
June 30, 1999, and the subsequent acquisitions of Optical Coating Laboratory,
Inc. ("OCLI") on February 4, 2000, E-TEK Dynamics ("E-TEK") on June 30, 2000 and
SDL, Inc. ("SDL") on February 13, 2001.
In 2001, the Company changed its year-end from a fiscal year ending June
30, to a 52-week year ending on the Saturday closest to June 30. This change had
no impact on the Company's results of operations, financial position, or cash
flows in 2001.
Certain amounts in prior year financial statements and notes thereto have
been reclassified to conform to current year presentation.
BASIS OF PRESENTATION
The consolidated financial statements include JDS Uniphase and its wholly
owned subsidiaries. All significant inter-company accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
INVESTMENTS
The Company's investments in marketable equity securities and all debt
securities are classified as available-for-sale and are recorded at fair value.
Fair value is based upon market prices quoted on the last day of the year. The
cost of securities sold is based on the specific identification method.
Unrealized gains and losses are reported as a separate component of
stockholders' equity. The Company periodically reviews these investments for
other-than-temporary declines in fair value and writes down these investments to
their fair value when an other-temporary-decline has occurred. The Company
generally believes other-than-temporary decline occurs when fair value of the
investment is below the carrying value for two full consecutive quarters.
The Company also has certain other minority investments in nonpublicly
traded companies. These investments are included in long-term investments on the
Company's balance sheet and are generally carried at cost. The Company monitors
these investments for impairment and makes appropriate reductions in carrying
values when necessary.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed
using standard cost, which approximates actual cost on a first-in, first-out
basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
by the straight-line method over the following estimated useful lives of the
assets: building and improvements, 5 to 45 years; machinery and equipment, 2 to
10 years; furniture, fixtures, software, and office equipment, 2 to 5 years.
Leasehold
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improvements are amortized by the straight-line method over the shorter of the
estimated useful lives of the assets or the term of the lease.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accrued compensation, and other accrued
liabilities, approximate fair value because of their short maturities. The fair
values of investments are determined using quoted market prices for those
securities or similar financial instruments.
EQUITY METHOD OF ACCOUNTING
The Company accounts for investments in joint ventures, limited liability
partnerships and other investments in 50 percent or less owned companies over
which it has the ability to exercise significant influence using the equity
method of accounting. The Company accounts for the increase or decrease of its
proportionate share of net book value in equity basis investments from the
investees' issuance of stock at a price above or below the net book value per
share as a change to additional paid-in capital. Due to the limited availability
of timely data, the Company records the adjustments to its equity basis
investments in the quarter subsequent to the issued financial statements. The
Company periodically reviews these investments for other-than-temporary declines
in market value and writes these investments to their fair value when an other-
temporary-decline has occurred.
VALUATION OF LONG LIVED ASSETS
Long-lived assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable such as
a significant industry downturn, significant decline in the market value of the
Company, or significant reductions in projected future cash flows of operating
segments. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of impairment charges for long-lived assets
and certain identifiable intangible assets including goodwill relating to those
assets that management expects to hold and use are based on the fair value of
such assets. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets represent licenses and intellectual property acquired,
purchased intangible assets and the excess acquisition cost over the fair value
of tangible and identified intangible net assets of businesses acquired
(goodwill). Purchased intangible assets include developed technology, trademarks
and trade names, assembled workforces and customer bases. Intangible assets are
being amortized using the straight-line method over estimated useful lives
ranging from 3 to 15 years.
The amortization and write-off of goodwill and purchased intangibles are
separately presented as a component of operating expenses on the Consolidated
Statement of Operations.
The Company assesses enterprise level goodwill for recoverability if the
market capitalization of the Company is less than its net assets. The Company
measures declines in value of enterprise level goodwill that are other than
temporary using the market value method. The Company measures the market value
at the consolidated company level based on the quoted market price of the
Company that is most representative of fair value of the Company's common stock
multiplied by the number of common shares outstanding.
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT AND OTHER RISKS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and trade receivables. The Company places its cash equivalents and
short-term investments with high credit-quality financial institutions. The
Company invests its excess cash equivalents and short-term investments primarily
in money market funds, commercial paper, municipal bonds, and auction rate
preferred stock. The Company has established guidelines relative to credit
ratings, diversification and maturities that seek to maintain safety and
liquidity. The Company sells primarily to customers involved in the application
of laser technology and the manufacture of telecommunications products. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. The Company is not
able to predict changes in the financial stability of its customers. Any
material change in the financial status of any one or a group of customers could
have a material adverse effect on the Company's results of operations. Although
such losses have been within management's expectations to date, there can be no
assurance that such reserves will continue to be adequate. The Company does not
require collateral from its customers. At June 30, 2001, Alcatel, Nortel, and
Ciena accounted for 21 percent, 10 percent, and 10 percent of accounts
receivable, respectively.
The Company depends on a single or limited number of outside contractors
and suppliers for raw materials, packages and standard components. The Company
generally purchases these single or limited source products through standard
purchase orders or one-year supply agreements and has no long-term guaranteed
supply agreements with such suppliers. While the Company seeks to maintain a
sufficient safety stock of such products and also endeavors to maintain ongoing
communications with its suppliers to guard against interruptions or cessation of
supply, the Company's business and results of operations could in the future be
adversely affected by a stoppage or delay of supply, substitution of more
expensive or less reliable products, receipt of defective parts or contaminated
materials, an increase in the price of such supplies, or the Company's inability
to obtain reduced pricing from its suppliers in response to competitive
pressures.
The Company uses a rolling six-month forecast based on anticipated product
orders, product order history and backlog to determine its material
requirements. Lead times for the parts and components that the Company orders
vary significantly and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. If actual orders do not match
our forecasts, as the Company experienced in the second half of 2001, the
Company may have excess or short-falls of some materials and components as well
as excess inventory purchase commitments. Furthermore, the Company could
experience reduced or delayed product shipments or could incur additional
inventory write-downs and cancellation charges or penalties, which would
increase costs or prevent or delay product shipments and could seriously impact
the Company's operating results.
FOREIGN CURRENCY TRANSLATION AND EXCHANGE CONTRACTS
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as
amended, as of the beginning of 2001. The standards require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The change in a derivative's fair value related to the ineffective portion of a
hedge, if any, will be immediately recognized in earnings. The effect of
adopting SFAS 133, as amended, did not have a material effect on the Company's
financial position or overall trends in results of operations.
The Company's objectives and strategies for holding and issuing derivatives
is to minimize the transaction and translation risks associated with
non-functional currency transactions.
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company conducts its business in a number of foreign countries and
sells its products directly to customers in Australia, Canada, China, France,
Germany, Hong Kong, Japan, Netherlands, Taiwan, Singapore and the United Kingdom
through its foreign subsidiaries. These sales are often denominated in the local
country's currency. Therefore, in the normal course of business, the Company's
financial position is routinely subjected to market risk associated with foreign
currency rate fluctuations. The Company's policy is to ensure that business
exposures to foreign exchange risks are identified, measured and minimized using
the most effective and efficient methods to eliminate or reduce such exposures.
The Company has entered into a number of foreign currency forward contracts, but
has not designated such contracts as hedges for accounting purposes. The foreign
currency forward contracts generally expire within 30 to 90 days. The change in
fair value of these foreign currency forward contracts is recorded as income
(loss) in the Company's Statement of Operations as a component of interest
income, net. The notional amount associated with these foreign currency forward
contracts is approximately $59 million and the fair value of such contracts is
not material to the Company's financial statements. The Company does not use
derivatives for trading purposes.
REVENUE RECOGNITION
The Company recognizes revenue at the time of delivery, with provisions
established for estimated product returns and allowances. Revenue on the
shipment of evaluation units is deferred until customer acceptance. The Company
provides for the estimated cost to repair products under warranty at the time of
sale.
COMPREHENSIVE INCOME
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of the accumulated net unrealized losses on
available-for-sale short term investments and foreign currency translation
adjustments, net of the related tax effect for all periods presented. The tax
effects for unrealized losses on short-term investments included in other
comprehensive loss were immaterial. At June 30, 2001, the Company had a balance
of unrealized gains on available-for-sale investments of $5.8 million, net of
tax. At June 30, 2000, the Company had a balance of unrealized losses on
available-for-sale investments of $1.9 million. Additionally, at June 30, 2001
and June 30, 2000, the Company had $30.2 million and $15.3 million,
respectively, of foreign currency translation losses. The components of
comprehensive loss are as follows (in millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------------
2001 2000 1999
---------- ------- -------
Net loss.............................................. $(56,121.9) $(904.7) $(171.1)
Unrealized gains (losses)............................. 7.7 (1.8) (0.2)
Change in foreign currency translation................ (14.9) (9.7) (4.1)
---------- ------- -------
Total comprehensive loss....................... $(56,129.1) $(916.2) $(175.4)
========== ======= =======
</Table>
LOSS PER SHARE
As the Company incurred a loss in 2001, 2000 and 1999, the effect of
dilutive securities totaling 47.3 million, 64.4 million, and 27.3 million
equivalent shares, respectively, have been excluded from the computation as they
are antidilutive.
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted loss
per share (in millions, except share data):
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------------
2001 2000 1999
---------- ------- -------
Denominator for basic and dilutive loss per
share -- weighted average shares.................... 1,091.9 710.9 318.2
========== ======= =======
Net loss.............................................. $(56,121.9) $(904.7) $(171.1)
========== ======= =======
Basic and dilutive loss per share..................... $ (51.40) $ (1.27) $ (0.54)
========== ======= =======
</Table>
STOCK-BASED COMPENSATION
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," as amended by Financial Accounting Standards Board Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation," ("FIN
44") the Company records and amortizes, over the related vesting periods,
deferred compensation representing the difference between the price per share of
stock issued or the exercise price of stock options granted and the fair value
of the Company's common stock at the time of issuance or grant. Stock
compensation costs are immediately recognized to the extent the exercise price
is below the fair value on the date of grant and no future vesting criteria
exist.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Estimates are used for, but not
limited to, the accounting for the allowance for doubtful accounts, inventory
write-downs, depreciation and amortization, sales returns, warranty costs,
restructuring costs, deferred taxes and contingencies. Actual results could
differ from those estimates and such differences could be material to the
financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. In
addition, SFAS 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of Statement 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The
Company is currently evaluating the impact of SFAS 141.
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives (but with
no maximum life). The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning June 30, 2002. Because of the different transition
dates for goodwill and intangible assets acquired on or before June 30, 2001 and
those acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption of SFAS 142 whereas new
goodwill and indefinite lived intangible assets acquired after June 30, 2001
will not. The Company is currently evaluating the impact of SFAS 142.
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. FINANCIAL INSTRUMENTS
INVESTMENTS
The Company's available for sale investments consist of the following (in
millions):
<Table>
<Caption>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
JUNE 30, 2001:
Floating rate bonds............................... $ 46.8 $ -- $-- $ 46.8
Municipal bonds................................... 568.4 6.8 -- 575.2
Auction instruments............................... 74.3 -- -- 74.3
Money market instruments and funds................ 731.7 -- -- 731.7
Corporate bonds................................... 65.6 0.5 -- 66.1
Agency bonds...................................... 49.9 0.1 -- 50.0
-------- ---- -- --------
Total debt investments............................ 1,536.7 7.4 -- 1,544.1
Marketable equity investments..................... 236.7 0.3 -- 237.0
-------- ---- -- --------
$1,773.4 $7.7 $-- $1,781.1
======== ==== == ========
</Table>
Available-for-sale investments included in the consolidated balance sheet
at June 30, 2001 is as follows (in millions):
<Table>
Cash equivalents............................................ $ 731.7
Short-term investments...................................... 1,049.4
--------
$1,781.1
========
</Table>
<Table>
<Caption>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
JUNE 30, 2000:
Floating rate bonds............................... $128.7 $-- $0.3 $128.4
Municipal bonds................................... 465.0 -- 1.5 463.5
Auction instruments............................... 69.0 -- -- 69.0
Money market instruments and funds................ 163.6 -- -- 163.6
------ -- ---- ------
Total debt investments............................ 826.3 -- 1.8 824.5
Marketable equity investments..................... 16.9 -- -- 16.9
------ -- ---- ------
$843.2 $-- $1.8 $841.4
====== == ==== ======
</Table>
Available-for-sale investments included in the consolidated balance sheet
at June 30, 2000 is as follows (in millions):
<Table>
Cash equivalents............................................ $ 29.2
Short-term investments...................................... 795.3
Long-term investments....................................... 16.9
------
$841.4
======
</Table>
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of contractual maturities of the Company's debt
investments (in millions):
<Table>
<Caption>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
JUNE 30, 2001:
Money market instruments and funds........................ $ 731.7 $ 731.7
Amounts maturing within one year.......................... 407.8 408.8
Amounts maturing after one year, within five years........ 397.2 403.6
-------- --------
$1,536.7 $1,544.1
======== ========
</Table>
During 2001, the Company completed the sale of its Zurich, Switzerland
subsidiary to Nortel Networks Corporation ("Nortel") for 65.7 million shares of
Nortel common stock valued at $1,953.3 million (see Note 13). The shares of
Nortel common stock are classified as available-for-sale securities. The Company
sold approximately 41.0 million shares resulting in a realized loss on the sale
of available-for-sale securities of $559.1 million. At June 30, 2001, the
Company had 24.7 million shares with a fair value of $223.1 million. The Company
has recognized a reduction in fair value of $511.8 million associated with the
24.7 million shares held by the Company as of June 30, 2001, as the Company has
determined the decline in the fair value of the shares of Nortel common stock to
be other-than-temporary. The reduction in fair value has been included in the
line item "Reduction in fair value of available-for-sale investments" in its
Statement of Operations for 2001. Should the fair value of the shares of Nortel
common stock held by or later sold by the Company continue to decline in the
near future, the Company may record additional losses related to these shares.
During 2001, the Company recorded a charge of approximately $10.3 million
related to a decline in the market value of another of the Company's
available-for-sale investments that was deemed to be other-than-temporary. The
reduction in fair value has been included in the line item "Reduction in fair
value of available-for-sale investments" in its Statement of Operations for
2001.
At June 30, 2001 and June 30, 2000, the Company had $104.0 million and
$50.6 million, respectively, of non-marketable equity securities accounted for
under the cost method. The cost of such investments is included in long-term
investments, which are recorded at cost.
EQUITY METHOD INVESTMENTS
At June 30, 2001, the Company had the following investments accounted for
using the equity method:
ADVA: On June 30, 2000, the Company acquired E-TEK Dynamics, Inc.
("E-TEK"), which at the time of acquisition had a 31 percent ownership stake in
ADVA, a publicly traded German company that develops and manufactures fiber
optic components and products. At June 30, 2001, the Company had a 29 percent
ownership stake in ADVA. At June 30, 2000, the Company's cost and estimated fair
value of its investment in ADVA was $701.1 million. In the process of completing
the E-TEK purchase accounting, the Company increased the cost and estimated fair
value of its investment in ADVA to $931.5 million during the first quarter of
2001. The difference between the cost of the investment and the underlying
equity in the net assets of ADVA is being amortized over a 5-year period. For
2001, the Company recorded $136.2 million in amortization expense related to the
difference between the cost of the investment and the underlying equity in the
net assets of ADVA. The significant decline in the fair value of ADVA, as of
March 31, 2001 and June 30, 2001, which the Company determined was
other-than-temporary required, that its carrying value be written down to fair
value and the amount of the write-down was included in earnings. As a result,
the Company recognized a $744.7 million charge to earnings to write down the
basis of its investment in ADVA to $41 million. For 2001, under the equity
method, the Company recorded a net loss of $9.5 million as its pro rata share of
ADVA's net loss. The Company's share of the net loss of ADVA for the quarter
ended June 30, 2001 was $5.0 million, which will be recorded by the Company in
the quarter ending September 30, 2001.
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Photonics Fund, LLP: During 2000 and 2001, the Company contributed $7.6
million for a 40 percent stake in The Photonics Fund, LLP, a California limited
liability partnership (the "Partnership"), which emphasizes privately negotiated
venture capital equity investments. The Partnership was formed on December 21,
1999 and extends to December 31, 2006, unless extended or terminated as provided
for in the Partnership agreement. At June 30, 2001, the carrying value of the
Company's equity share in the Partnership was $13.9 million. The market value of
the Company's equity share in the Partnership at June 30, 2001 was $14.2
million. The Company's share of the earnings of the Partnership for the quarter
ended June 30, 2001 was $0.3 million, which will be recorded by the Company in
the quarter ended September 30, 2001.
NOTE 3. BALANCE SHEET DETAIL
The components of inventory consist of the following (in millions):
<Table>
<Caption>
JUNE 30,
---------------
2001 2000
------ ------
Finished goods.............................................. $ 56.1 $ 39.2
Work in process............................................. 99.2 176.7
Raw materials and purchased parts........................... 132.3 159.5
------ ------
$287.6 $375.4
====== ======
</Table>
The Company recorded a loss on purchase commitments of $59.8 million and
inventory write-down of $510.6 million during the fourth quarter of 2001. These
additional charges to cost of sales were due to (i) a sudden and significant
decrease in forecasted sales in the fourth quarter of 2001 and were calculated
based on inventory levels and purchase commitments in excess of expected demand
for each specific product and (ii) product consolidations and discontinuations
in connection with the Global Realignment Program (see Note 12).
The components of property, plant and equipment are as follows (in
millions):
<Table>
<Caption>
JUNE 30,
-----------------
2001 2000
-------- ------
Land........................................................ $ 36.3 $ 33.2
Building and improvements................................... 167.0 127.4
Machinery and equipment..................................... 683.9 439.8
Furniture, fixtures, software and office equipment.......... 207.0 40.5
Leasehold improvements...................................... 106.7 28.8
Construction in progress.................................... 210.3 84.1
-------- ------
1,411.2 753.8
Less: accumulated depreciation.............................. (238.2) (83.1)
-------- ------
$1,173.0 $670.7
======== ======
</Table>
The Company recorded a write-down of $122.2 million of facilities and
equipment during the fourth quarter of 2001 as part of the Company's Global
Realignment Program (See Note 12).
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of intangible assets are as follows (in millions):
<Table>
<Caption>
JUNE 30,
---------------------
2001 2000
--------- ---------
Goodwill.................................................... $10,985.6 $21,307.1
Purchased intangibles....................................... 2,353.6 1,945.5
Licenses and other intellectual property.................... 4.5 5.6
--------- ---------
13,343.7 23,258.2
Less: accumulated amortization.............................. (6,298.1) (920.4)
--------- ---------
$ 7,045.6 $22,337.8
========= =========
</Table>
The Company recorded a reduction of goodwill and other intangible assets of
$50.1 billion during 2001 (see Note 12).
The components of other current liabilities are as follows (in millions):
<Table>
<Caption>
JUNE 30,
---------------
2001 2000
------ ------
Acquisition costs........................................... $ 1.8 $135.4
Warranty reserve............................................ 49.7 11.3
Legal accrual............................................... 28.7 1.5
Deferred revenue............................................ 34.3 5.4
Loss on purchase commitments................................ 52.8 --
Other....................................................... 158.8 91.0
------ ------
$326.1 $244.6
====== ======
</Table>
The loss on purchase commitments is related to commitments to purchase
excess inventory.
Acquisition costs at June 30, 2000 consisted primarily of $92.0 million of
estimated direct transaction costs associated with the acquisition of E-TEK,
approximately $34.7 million in costs incurred by E-TEK in connection with the
acquisition and $8.7 million of direct transaction costs associated with other
acquisitions in 2000.
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LINES OF CREDIT AND LONG-TERM DEBT
The Company had two Standby Letter of Credit facilities totaling
approximately U.S. $11.0 million. The Company also has an unsecured operating
bank line of credit for U.S. $25.0 million. Advances under the line of credit
bear interest at the Canadian Prime Rate of plus a spread of fifty basis points.
As of June 30, 2001, the rate was 6.25 percent and the Company had no
outstanding borrowings under this facility. The following table summarized the
debt obligations (in millions):
<Table>
<Caption>
JUNE 30, JUNE 30,
2001 2000
-------- --------
Secured term loan, interest at 7.85% per annum. Monthly
principal and interest payments are $0.1 million with
final payment on December 1, 2001. ....................... $ 7.1 $ 7.3
Secured term loan, interest at 6.38% per annum. Monthly
principal and interest are $0.2 million with final payment
on January 1, 2002. ...................................... 1.7 4.4
Secured term loan, interest 1.33% to 1.35% per annum.
Interest is payable monthly. Principal is payable March
15, 2002. ................................................ -- 6.5
Secured term loan, interest at 6.46% per annum. Monthly
principal and interest payments are $0.1 million with
final payment on September 1, 2002. ...................... 1.9 3.2
Secured term loan, interest at 7.73% per annum. Monthly
principal and interest payments are $0.3 million with
final payment on January 1, 2003. ........................ 5.6 8.7
Secured term loan, interest at 6.89% per annum. Monthly
principal and interest are $0.2 million with final payment
on April 15, 2002......................................... 2.0 4.4
Secured term loan, interest at 8.46% per annum. Monthly
principal and interest are $0.2 million with final payment
on April 15, 2003. ....................................... 4.8 7.1
Secured term loan, interest at 8.01% per annum. Monthly
principal and interest are $0.3 million with final payment
on April 15, 2003. ....................................... 6.4 9.5
Secured bond, interest rate is variable and based on Tax
Exempt Note Rate plus 0.625% and is reset weekly. The
interest rate at June 30, 2001 was 4.8%. Interest is
payable quarterly. Principal is payable August 1,
2016. .................................................... 5.0 5.0
----- -----
Total....................................................... 34.5 56.1
Less current maturities, included in other current
liabilities............................................ 21.7 15.1
----- -----
Total long-term debt, net of current maturities........ $12.8 $41.0
===== =====
</Table>
Annual debt maturities are as follows (in millions):
<Table>
Year 2002................................................... $21.7
Year 2003................................................... 7.8
Year 2004................................................... --
Year 2005................................................... --
Thereafter.................................................. 5.0
-----
$34.5
=====
</Table>
63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES
The expense (benefit) for income taxes consists of the following (in
millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
-----------------------
2001 2000 1999
------- ----- -----
Federal:
Current................................................... $ (86.4) $34.0 $15.4
Deferred.................................................. (226.6) (17.5) (3.0)
------- ----- -----
(313.0) 16.5 12.4
State:
Current................................................... 23.0 5.0 1.4
Deferred.................................................. (32.4) (2.3) (0.2)
------- ----- -----
(9.4) 2.7 1.2
Foreign:
Current................................................... 80.9 115.9 9.8
Deferred.................................................. (130.4) (60.2) (1.9)
------- ----- -----
(49.5) 55.7 7.9
------- ----- -----
Income tax expense (benefit).............................. $(371.9) $74.9 $21.5
======= ===== =====
</Table>
The tax benefit associated with exercises of stock options reduced taxes
currently payable by $142.7 million, $47.7 million and $11.4 million for the
fiscal years ended June 30, 2001, 2000 and 1999, respectively.
Income (loss) before income taxes consisted of the following (in millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------------
2001 2000 1999
---------- ------- -------
Domestic.............................................. $(56,544.0) $(452.5) $ 29.3
Foreign............................................... 50.2 (377.3) (178.9)
---------- ------- -------
$(56,493.8) $(829.8) $(149.6)
========== ======= =======
</Table>
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax expense (benefit) at the federal
statutory rate to the income tax provision (benefit) at the effective tax rate
is as follows (in millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
-----------------------------
2001 2000 1999
---------- ------- ------
Income tax expense (benefit) computed at federal
statutory rate....................................... $(19,772.9) $(290.4) $(52.4)
State taxes, net of federal benefit.................... (6.1) 1.8 0.8
Non-deductible acquired in-process research &
development.......................................... 137.6 126.2 82.1
Reduction of goodwill.................................. 17,515.3 -- --
Non-deductible amortization............................ 1,688.7 208.4 --
Non-deductible merger expenses incurred in pooling of
interests transaction................................ -- -- 2.3
Income tax expense (benefit) from net earnings of
foreign subsidiary considered to be permanently
invested in non-U.S. operations...................... 10.1 (5.5) (4.6)
Valuation allowance.................................... 51.2 42.0 (0.4)
Tax exempt income...................................... (10.6) (7.1) (1.2)
Gain on sale of foreign subsidiary..................... 10.9 -- --
Other.................................................. 3.9 (0.5) (5.1)
---------- ------- ------
Income tax expense (benefit)........................... $ (371.9) $ 74.9 $ 21.5
========== ======= ======
</Table>
On February 13, 2001, the Company completed the sale of its Zurich,
Switzerland subsidiary to Nortel and realized a gain of $1,770.2 million. As a
result of the sale, the Company provided for $10.1 million of U.S. income taxes
in connection with foreign earnings of this subsidiary that had previously been
considered to be permanently invested offshore.
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred taxes consist of the following (in millions):
<Table>
<Caption>
JUNE 30,
-------------------
2001 2000
-------- --------
Deferred tax assets:
Tax credit carryforwards.................................. $ 25.1 $ 8.4
Net operating loss carryforwards.......................... 851.3 356.7
Inventory................................................. 214.1 24.6
Additional tax basis of intangibles....................... 87.3 4.9
Accruals and reserves..................................... 153.5 35.2
Other..................................................... 17.1 9.2
Acquisition related items................................. 794.1 841.5
-------- --------
Total deferred tax assets............................ 2,142.5 1,280.5
Valuation allowance....................................... (996.0) (575.4)
-------- --------
Net deferred tax assets.............................. 1,146.5 705.1
Deferred tax liabilities:
Acquisition related items................................. (669.6) (899.0)
Investment holdings....................................... (61.7) --
Other..................................................... (4.1) (3.1)
-------- --------
Total deferred tax liabilities....................... (735.4) (902.1)
-------- --------
Total net deferred tax assets (liabilities).......... $ 411.1 $ (197.0)
======== ========
</Table>
The valuation allowance increased by approximately $420.6 million, $564.5
million, and $1.7 million in 2001, 2000 and 1999, respectively. The valuation
allowance for deferred tax assets reduces the net deferred tax assets to $411.1
million, an amount the Company believes is more likely than not realizable.
Approximately $81 million of the net deferred tax assets are supported by
foreign recoverable income taxes. Realization of the remaining $330.1 million of
net deferred tax assets is based on the Company's projections of future domestic
taxable income. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if the estimate of future domestic
taxable income is reduced.
Approximately $663.0 million of the valuation allowance at June 30, 2001 is
attributable to stock option deductions, the benefit of which will be credited
to paid-in-capital when realized. Approximately $192.6 million of the valuation
allowance at June 30, 2001 is attributable to deferred tax assets that when
realized, will first reduce unamortized goodwill, other intangible assets of
acquired subsidiaries, and then income tax expense.
At June 30, 2001, the Company had federal and state net operating loss
carryforwards of approximately $2,296.9 million and $945.3 million,
respectively, and federal and state research and development credit
carryforwards of approximately $18.1 million and $12.1 million, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2002, if not utilized.
NOTE 6. LEASE COMMITMENTS
The Company leases certain of its facilities and certain equipment under
operating leases. The operating facilities leases contain renewal options.
Certain of the Company's facility leases provide for periodic rent increases
based on general rate of inflation.
As part of certain lease transactions, the Company has an option to
purchase the property (land or ground lease interest) and improvements for $37.9
million or, at the end of the lease, to arrange for the sale of the
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
property to a third party with the Company retaining an obligation to the owner
for the difference between the sales price and the guaranteed residual value of
$32.2 million if the sales price is less than this amount, subject to certain
provisions of the lease. Additionally, the Company restricted $37.9 million of
its investment securities as collateral for specified obligations of the lessors
under the leases. These investment securities are restricted as to withdrawal
and are managed by a third party subject to certain limitations under the
Company's investment policy. In addition, the Company must maintain a minimum
consolidated tangible net worth, as defined, of $500.0 million.
In connection with the Company's Global Realignment Program, the Company
incurred a charge of $63.0 million for exiting and terminating lease facilities
included in the below table.
The future minimum rental payments as of June 30, 2001, under operating
leases are as follows (in millions):
<Table>
<Caption>
OPERATING
YEAR ENDING JUNE 30, LEASES
-------------------- ---------
2002........................................................ $ 49.6
2003........................................................ 42.4
2004........................................................ 40.0
2005........................................................ 37.6
2006........................................................ 31.3
Thereafter.................................................. 85.9
------
Total minimum lease payments......................... $286.8
======
</Table>
Rental expense for operating leases for the years ended June 30, 2001, 2000
and 1999 amounted to approximately $32.4 million, $9.3 million, and $5.0
million, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
On June 30, 1999, Furukawa Electric Co., LTD. ("Furukawa") and its
subsidiaries, in conjunction with the Company's acquisition of JDS FITEL,
acquired 24 percent of the Company's outstanding common stock and exchangeable
shares. At June 30, 2001, Furukawa owned approximately 10 percent of the
Company's outstanding common stock and exchangeable shares.
During 2001 and 2000, the Company entered into transactions with Furukawa
in the normal course of business. Transactions with Furukawa for 2001 and 2000
are as follows (in millions):
<Table>
<Caption>
JUNE 30, JUNE 30,
2001 2000
-------- --------
Sales....................................................... $3.2 $ 0.9
Purchases................................................... -- 13.1
Accounts receivable......................................... 1.8 0.6
Accounts payable............................................ $ -- $10.2
</Table>
Two members of the Company's Board of Directors were Vice Presidents at
Cisco Systems, Inc ("Cisco") during portions of 2001. Transactions with Cisco
for 2001 are as follows (in millions):
<Table>
<Caption>
JUNE 30,
2001
--------
Sales....................................................... $147.5
Accounts receivable......................................... $ 10.6
</Table>
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. EMPLOYEE BENEFIT PLAN
The Company has an employee 401(k) salary deferral plan, covering all
domestic employees. Employees may make contributions by withholding a percentage
of their salary up to the IRS annual limit ($10,500 for 2001). For the first six
months of the 2001, Company contributions consist of $0.25 per dollar
contributed by the employees with at least six months of service. Effective
January 1, 2001, the Company adopted a safe harbor company match which provides
a 100 percent match on the first 3 percent of compensation and 50 percent of
each participant's salary deferrals in excess of 3 percent of compensation up to
a maximum of 5 percent of compensation, subject to a maximum match contribution
of $3,400 for those employees the IRS considers Highly Compensated Employees
(for 2001, earning $85,000 or more). Company contributions were approximately
$3.2 million, $2.5 million, and $0.6 million for the years ended June 30, 2001,
2000 and 1999, respectively.
Pursuant to the Company's acquisition of OCLI, E-TEK, and SDL, the Company
assumed responsibility of the OCLI, E-TEK, and SDL 401(k) Savings Plans and the
employees of OCLI, E-TEK and SDL continued their 401(k) participation with their
respective plans. The OCLI, E-TEK, and SDL plans were converted to the Company's
plan in June 2001. The following is a description of the OCLI, E-TEK, and SDL
plans:
OCLI has a 401(k) pre-tax voluntary retirement savings plan for its U.S.
employees. The Company matches 100 percent of the first 3 percent of deferred
salary and 50 percent for the next 3 percent of deferred salary. Eligible
employees can defer up to 15 percent of their salary, up to the IRS annual
limit. Contributions to the 401(k) plan are immediately vested. Company matching
contributions to the 401(k) plan are funded in cash.
E-TEK sponsors a 401(k) Savings Plan ("E-TEK Plan"). All E-TEK employees
are eligible to participate in the E-TEK Plan following certain minimum
eligibility requirements. Under the E-TEK Plan, employees may elect to
contribute up to 20 percent of their compensation to the E-TEK Plan, subject to
annual limitations. Matching contributions from E-TEK are 50 cents on the
dollar, to a maximum of $1,000 per year. E-TEK contributions are vested over
four years. Employee contributions are immediately vested.
SDL sponsors a Profit Sharing and Saving Plus Plan ("SDL Plan"). The SDL
Plan covers substantially all U.S. full-time employees and is qualified under
Sections 401(a) and 401(k) of the Internal Revenue Code. Under the SDL Plan,
participants may defer up to 20 percent of their pre-tax earnings (up to the
Internal Revenue Service limit). SDL matches 50 percent of employee
contributions up to a maximum of 5 percent of the participant's pre-tax
earnings. The participants' as well as the Company's matching contributions are
fully vested.
NOTE 9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In connection with the acquisition of UNL, the Company issued 100,000
shares of non-voting, non-cumulative Series A Preferred Stock to Philips having
a par value of $0.001 per share. The Series A Preferred Stock is convertible
into additional shares of common stock based on an agreed upon formula for
annual and cumulative shipments of certain products during the four-year period
ending June 30, 2002. The number of shares of common stock to be issued upon
conversion of this preferred stock is tied to unit shipments of certain products
by UNL during the four-year period ending June 30, 2002 and the Company's stock
price at the date the contingency attributable to the unit shipments is removed.
During the fourth quarter of 2001, UNL achieved cumulative shipments of certain
products that will require the Company to issue at least $90.8 million of the
Company's common stock to the former shareholder of UNL. The number of common
shares to be issued is based on the stock price at the end of the earn-out
period. The Preferred Stock is also convertible into common stock upon the
occurrence of a Redemption Event, as defined in the Series A Preferred Stock
Agreement. All redemption events are solely within the control of the Company.
68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Company adopted a Stockholder Rights Agreement, as
amended (the "Company Rights Agreement") and declared a dividend distribution of
one right (a "Right") per share of common stock for stockholders of record as of
July 6, 1998. As adjusted for stock splits and dividends by the Company, each
outstanding share of the Company's common stock currently includes one-eighth of
a Right. Each Right entitles stockholders to purchase 1/1000 share of the
Company's Series B Preferred Stock at an exercise price of $3,600. The Rights
only become exercisable in certain limited circumstances following the tenth day
after a person or group announces acquisitions of or tender offers for 15
percent or more of the Company's common stock. For a limited period of time
following the announcement of any such acquisition or offer, the Rights are
redeemable by the Company at a price of $0.01 per Right. If the Rights are not
redeemed, each Right will then entitle the holder to purchase common stock
having the value of twice the then-current exercise price. For a limited period
of time after the exercisability of the Rights, each Right, at the discretion of
the Board, may be exchanged for either 1/1000 share of the Company's Series B
Preferred Stock or one share of common stock per Right. The Rights expire on
June 22, 2008.
The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of an additional 799,999
shares of Preferred Stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors may
determine, including the consideration received therefore, the number of shares
comprising each series, dividend rates, redemption provisions, liquidation
preferences, redemption fund provisions, conversion rights and voting rights,
all without the approval of the holders of common stock.
EXCHANGEABLE SHARES OF JDS UNIPHASE CANADA LTD.
On June 30, 1999, in connection with the merger with JDS FITEL, JDS
Uniphase Canada Ltd., a subsidiary of the Company, adopted an Exchangeable Share
Rights Plan (the "Exchangeable Rights Plan") substantially equivalent to the
Company Rights Agreement. Under the Exchangeable Rights Plan, each Exchangeable
Share issued has an associated right (an "Exchangeable Share Right") entitling
the holder of such Exchangeable Share Right to acquire additional Exchangeable
Shares on terms and conditions substantially the same as the terms and
conditions upon which a holder of shares of common stock is entitled to acquire
either 1/1000 share of the Company's Series B Preferred Stock or, in certain
circumstances, shares of common stock under the Company Rights Agreement. The
definitions of beneficial ownership, the calculation of percentage ownership and
the number of shares outstanding and related provisions of the Company Rights
Agreement and the Exchangeable Rights Plan apply, as appropriate, to shares of
common stock and Exchangeable Shares as though they were the same security. The
Exchangeable Share Rights are intended to have characteristics essentially
equivalent in economic effect to the Rights granted under the Company Rights
Agreement.
STOCK OPTION PLANS
As of June 30, 2001 JDS Uniphase had reserved approximately 50,431,000 of
common stock for future issuance to employees and directors under its Restated
1993 Flexible Stock Incentive Plan (the "1993 Option Plan"), the 1996
Non-qualified Stock Option Plan ("the 1996 Option Plan"), and the other various
plans the Company assumed as a result of acquisitions. The Board of Directors
has the authority to determine the type of option and the number of shares
subject to option. The exercise price is generally equal to fair value of the
underlying stock at the date of grant. Options generally become exercisable over
a four-year period and, if not exercised, expire from five to ten years from the
date of grant.
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity through June 30, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING
--------------------- WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
--------- --------- --------
(IN THOUSANDS, EXCEPT PRICE PER
SHARE)
Balance at June 30, 1998.................................... 15,828 53,316 $ 2.37
Increase in authorized shares............................. 27,888 -- --
Plans assumed related to acquisitions..................... 29,700 -- --
Options converted related to acquisitions................. (29,700) 29,700 10.88
Granted................................................... (20,012) 20,012 9.24
Canceled.................................................. 2,312 (2,312) 4.53
Exercised................................................. -- (11,836) 1.37
Expired................................................... (24) -- --
------- ------- ------
Balance at June 30, 1999.................................... 25,992 88,880 5.83
Increase in authorized shares............................. 66,989 -- --
Plans assumed related to acquisitions..................... 31,015 -- --
Options converted related to acquisitions................. (31,015) 31,015 30.62
Granted................................................... (60,350) 60,350 40.91
Canceled.................................................. 3,011 (3,011) 14.85
Exercised................................................. -- (35,791) 3.00
Expired................................................... (321) (35) 5.15
------- ------- ------
Balance at June 30, 2000.................................... 35,321 141,408 26.62
Increase in authorized shares............................. 50,914 -- --
Plans assumed related to acquisitions..................... 43,506 -- --
Options converted related to acquisitions................. (43,506) 43,506 32.35
Granted................................................... (46,789) 46,789 36.17
Canceled.................................................. 9,230 (16,942) 45.22
Exercised................................................. -- (41,576) 9.03
Expired................................................... 1,755 (1,647) 51.61
------- ------- ------
Balance at June 30, 2001.................................... 50,431 171,538 $33.02
======= ======= ======
</Table>
70
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding at
June 30, 2001 (shares in thousands):
<Table>
<Caption>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
REMAINING WEIGHTED WEIGHTED
AVERAGE RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE EXERCISE NUMBER EXERCISE
(150% INCREMENTS) OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
$ 0.00-$ 0.01 125 8.1 $ 0.01 42 $ 0.01
0.02- 0.02 851 1.2 0.02 831 0.02
0.04- 0.05 631 9.3 0.04 27 0.04
0.10- 0.10 32 1.0 0.10 32 0.10
0.23- 0.34 299 3.0 0.31 299 0.31
0.35- 0.43 133 3.7 0.38 133 0.38
0.57- 0.82 2,107 4.3 0.72 1,796 0.71
0.86- 1.28 3,891 5.7 1.01 3,213 1.00
1.30- 1.91 5,464 5.4 1.55 4,472 1.57
1.97- 2.96 986 3.9 2.59 848 2.57
3.13- 4.65 9,487 4.6 4.12 6,931 4.12
4.72- 7.05 13,360 6.1 6.55 7,436 6.48
7.19- 10.77 2,950 6.2 9.57 989 9.52
10.81- 15.97 27,893 7.6 14.47 888 14.90
16.23- 24.21 45,909 6.1 19.99 14,294 20.30
24.52- 36.41 9,140 7.8 29.55 2,518 29.19
38.50- 57.50 11,379 7.5 51.18 3,072 52.49
58.52- 87.63 19,416 8.6 70.01 1,691 70.80
88.00- 131.81 17,235 7.3 111.64 3,275 114.87
132.31- 146.53 250 6.7 139.86 77 139.91
----------------- ------- --- ------- ------ -------
$ 0.00-$146.53 171,538 6.8 $ 33.02 52,864 $ 21.66
======= ======
</Table>
EMPLOYEE STOCK PURCHASE PLANS
The JDS Uniphase 1998 Employee Stock Purchase Plan (the "98 Purchase Plan")
was adopted in June 1998. The Company has reserved 20,000,000 shares of common
stock for issuance under the 98 Purchase Plan and has 18,087,940 shares
remaining. The 98 Purchase Plan, effective August 1, 1998, provides eligible
employees with the opportunity to acquire an ownership interest in JDS Uniphase
through participation in a program of periodic payroll deductions applied at
specific intervals to the purchase of common stock. The Purchase Plan is
structured as a qualified employee stock purchase plan under Section 423 of the
amended Internal Revenue Code of 1986. However, the Purchase Plan is not
intended to be a qualified pension, profit sharing or stock bonus plan under
Section 401(a) of the 1986 Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974. The Purchase Plan will
terminate upon the earlier of August 1, 2008 or the date on which all shares
available for issuance under the Purchase Plan have been sold.
The JDS Uniphase Corporation 1999 Canadian Employee Stock Purchase Plan
(the "Canadian Plan") was adopted in November 1999. The Company has reserved
1,000,000 shares of common stock for issuance under the Canadian Plan and has
674,730 shares remaining. The Canadian Plan has similar provisions to the
Company's existing plans.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Company's acquisition of OCLI, E-TEK and SDL, the Company
continued the OCLI, E-TEK and SDL Employee Stock Purchase Plans, which have
similar provisions to the Company's existing plans. The plans will continue
through December 31, 2000, April 30, 2002 and October 10, 2002 for OCLI, E-TEK,
and SDL, respectively.
STOCK BASED COMPENSATION
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," as amended by FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized in the Company's
financial statements.
In connection with certain of the Company's acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for the Company's common stock effective at the acquisition date.
These options did not reduce the shares available for grant under any of the
Company's other option plans. For acquisitions accounted for as purchases, the
fair value of these options was included as part of the purchase price. As of
July 1, 2000, the Company began recording deferred compensation related to
unvested options held by employees of companies acquired in a purchase
acquisition, in accordance with FIN No. 44. Deferred stock-based compensation
expense related to acquisitions was $52.6 million in 2001. The deferred expense
calculation and future amortization is based on the graded vesting schedule of
the awards.
In connection with the termination of a former executive, the Company
extended the exercise period for options to purchase 1,216,010 shares of common
stock at exercise prices ranging from $2.60 to $105.59. The Company determined
the compensation expense for these stock options based on the stock price on the
date of modification. As a result, the Company recorded compensation expense
associated with these stock options of $11.1 million.
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options (including shares issued under the
Employee Stock Purchase Plan, collectively called "options") granted subsequent
to June 30, 1995 under the fair value method of that statement. The fair value
of options granted in 2001, 2000, and 1999 reported below has been estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions:
<Table>
<Caption>
EMPLOYEE STOCK EMPLOYEE STOCK
OPTIONS PURCHASE PLAN SHARES
------------------ ---------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ----- ----- -----
Expected life (in years).............................. 5.00 5.50 6.10 0.50 0.60 0.50
Volatility............................................ 0.78 0.70 0.67 0.78 0.70 0.68
Risk-free interest rate............................... 5.00% 6.00% 5.60% 5.70% 5.00% 5.60%
Dividend yield........................................ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</Table>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options. A total of approximately 90,295,000
and 91,365,000 options, including options assumed through acquisitions, were
granted during 2001 and during 2000, respectively, with exercise prices equal to
the market
72
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price of the stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these options in 2001 were $34.34 and $26.81,
respectively. The weighted-average exercise price and weighted-average fair
value of these options in 2000 were $40.94 and $27.92, respectively. The
weighted-average exercise price and weighted-average fair value of stock options
granted during 1999 was $10.22 and $3.05 per share, respectively. The weighted
average fair value of shares granted under the Employee Stock Purchase Plan
during 2001, 2000, and 1999 was $21.92, $7.93, $1.56, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in millions, except per share data):
<Table>
<Caption>
YEARS ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- -------
Pro forma net loss.................................. $(56,557.9) $(1,110.5) $(228.7)
Pro forma loss per share............................ $ (51.80) $ (1.56) $ (0.72)
</Table>
NOTE 10. MERGERS AND ACQUISITIONS
SDL
On February 13, 2001, the Company completed the acquisition of SDL Inc., a
world leader in providing products for optical communications and related
markets. The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of SDL
subsequent to the acquisition date. The merger agreement provided for the
exchange of 3.8 shares of the Company's common stock and options to purchase
shares of the Company's common stock for each common share and outstanding
option of SDL, respectively. The total purchase price of $41.2 billion included
consideration of 333.8 million shares of the Company's common stock valued at an
average market price of $111.13 per common share. The average market price is
based on the average closing price for a range of trading days around the
announcement date (July 10, 2000) of the merger. In addition, the Company issued
options to purchase 42.6 million shares of common stock valued at $4.1 billion
in exchange for SDL options. The Company also provided cash consideration of
$0.2 million to the former shareholders of SDL in respect of fractional shares
relinquished in connection with the acquisition. The value of the options, as
well as estimated direct transaction costs of $44.6 million, have been included
as part of the total purchase cost.
The total purchase cost of the SDL merger is as follows (in millions):
<Table>
Value of securities issued.................................. $37,091.9
Assumption of SDL options................................... 4,056.4
Cash consideration.......................................... 0.2
---------
Total consideration....................................... 41,148.5
Estimated transaction costs................................. 44.6
---------
Total purchase cost....................................... $41,193.1
=========
</Table>
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation is as follows (in millions):
<Table>
Tangible net assets......................................... $ 617.4
Intangible assets acquired:
Existing technology.................................... 455.4
Core technology........................................ 214.2
Trademarks and tradename............................... 46.0
Assembled workforce.................................... 47.7
Deferred compensation....................................... 203.7
Goodwill.................................................... 39,228.0
In-process research and development......................... 380.7
---------
Total purchase price:....................................... $41,193.1
=========
</Table>
Tangible net assets acquired include cash, accounts receivable, inventories
and fixed assets (including an adjustment to write-up inventory of SDL to fair
value by $22.9 million and an adjustment to write-up fixed assets of SDL to fair
value by $5.8 million). Liabilities assumed principally include accounts
payable, accrued compensation and accrued expenses.
The Company paid certain SDL executives $300.9 million in consideration of
their agreement to amend their change of control agreements and enter into
non-compete agreements with the Company. These costs were charged to selling,
general and administrative expense as compensation expense during the third
quarter of 2001.
A portion of the purchase price has been allocated to developed technology
and acquired in-process research and development. Developed technology and
in-process research and development ("IPR&D") were identified and valued through
analysis of data provided by SDL concerning developmental products, their stage
of development, the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPR&D.
Developmental projects that had reached technological feasibility were
classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered the importance of each project
to the overall development plan, estimating costs to develop the purchased IPR&D
into commercially viable products, estimating the resulting net cash flows from
the projects when completed and discounting the net cash flows to their present
value. The sales estimates used to value the purchased IPR&D were based on
estimates or relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
SDL and its competitors. The rates utilized to discount the net cash flows to
their present value are based on SDL's weighted average cost of capital. Given
the nature of the risks associated with the difficulties and uncertainties in
completing each project and thereby achieving technological feasibility,
anticipated market acceptance and penetration, market growth rates and risks
related to the impact of potential changes in future target markets, the
weighted average cost of capital was adjusted. Based on these factors, discount
rates of 12 percent and 20 percent were deemed appropriate for the developed and
in-process technology, respectively.
74
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimates used in valuing IPR&D were based upon assumptions believed to
be reasonable but which are inherently uncertain and unpredictable. Assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on SDL's financial condition and results of operations.
The acquired existing technology, was comprised of products that are already
technologically feasible, includes products in most of SDL's product lines. The
Company is amortizing the acquired existing technology of approximately $455.4
million on a straight-line basis over an average estimated remaining useful life
of five years. The acquired core technology represents SDL trade secrets and
patents developed through years of experience in design, package and manufacture
of laser components and modules for fiber optic telecommunication networks.
SDL's products are designed for long-haul applications, as well as emerging
short-haul applications, such as metropolitan area networks. This proprietary
know-how can be leveraged by the Company to develop new and improved products
and manufacturing processes. The Company is amortizing the acquired core
technology of approximately $214.2 million on a straight-line basis over an
average estimated remaining useful life of five years.
The trademarks and tradenames include the SDL trademark and tradename. The
Company is amortizing the trademarks and trade names of approximately $46.0
million on a straight-line basis over an estimated remaining useful life of five
years.
The acquired assembled workforce was comprised of over 1,660 skilled
employees across SDL's Executive, Research and Development, Manufacturing,
Supervisor/Manager, and Sales and Marketing groups. The Company is amortizing
the value assigned to the assembled workforce of approximately $47.7 million on
a straight-line basis over an estimated remaining useful life of four years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of five years.
OPA
In January 2001, the Company acquired Optical Process Automation Corp.
("OPA") of Melbourne, Florida. OPA also has operations in Asheville, North
Carolina. OPA designs and manufactures automated and semi-automated systems for
the manufacture of fiber optic components and modules. The transaction was
accounted for as a purchase and accordingly, the accompanying financial
statements include the results of operations of OPA subsequent to the
acquisition date. The total purchase price of $168.5 million included
consideration of 2.4 million shares of the Company's common stock valued at
$131.8 million, the issuance of options to purchase an additional 0.7 million
shares of JDS Uniphase common stock valued at $36.5 million in exchange for OPA
options and direct transaction costs of $0.2 million. The purchase price
allocation included net tangible deficit of $4.6 million, acquired IPR&D of $3.0
million, purchased intangibles of $15.5 million, $30.1 million related to
deferred compensation on unvested options and goodwill of $124.5 million. The
purchased intangibles and goodwill are being amortized over a period of two to
seven years. Subject to the completion of certain milestones, the purchase
agreement also provides for the issuance of additional shares of JDS Uniphase
common stock, estimated to be approximately $29.9 million, with the final
milestone payment scheduled to be paid on or prior to January 31, 2004.
IRIDIAN SPECTRAL TECHNOLOGIES LIMITED
In October 2000, the Company acquired the remaining 80.1 percent interest
in Iridian Spectral Technologies Limited ("Iridian") of Ottawa, Canada. Iridian
is a supplier of custom designed thin film filters. The transaction was
accounted for as a purchase and accordingly, the accompanying financial
statements include the results of operations of Iridian subsequent to the
acquisition date. The total purchase price of $39.4 million included
consideration of 0.4 million exchangeable shares of the Company's subsidiary,
JDS Uniphase Canada Ltd. valued at $34.6 million, $4.7 million in cash and
direct transaction costs of $0.1 million.
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation included net tangible assets of $2.3 million,
acquired IPR&D of $0.6 million, purchased intangibles of $1.3 million, and
goodwill of $35.2 million. The purchased intangibles and goodwill are being
amortized over a period of five years.
EPION CORPORATION
In September 2000, the Company acquired Epion Corporation ("Epion") of
Billerica, Massachusetts. Epion is a developer of gas cluster ion beam ("GCIB")
technology and a manufacturer of pulsed laser deposition ("PLD") equipment. The
transaction was accounted for as a purchase and accordingly, the accompanying
financial statements include the results of operations of Epion subsequent to
the acquisition date. The initial purchase price of $95.3 million included
consideration of 0.8 million shares of JDS Uniphase common stock valued at $86.8
million, the issuance of options to purchase an additional 91,862 shares of JDS
Uniphase common stock valued at $8.2 million in exchange for Epion options and
direct transaction costs of $0.3 million. The purchase price allocation included
net tangible assets of $11.0 million, acquired IPR&D of $8.9 million, purchased
intangibles of $10.9 million, $3.7 million related to deferred compensation on
unvested options and goodwill of $60.8 million. The purchased intangibles and
goodwill are being amortized over a period of three to five years. Subject to
the completion of certain milestones, the merger agreement also provides for the
issuance of additional shares of common stock, estimated to be approximately
$150.0 million, with the final milestone payment scheduled to be paid on or
prior to January 31, 2003. During the second and third quarters of 2001, Epion
reached three milestones that resulted in the Company issuing 1.4 million shares
of JDS Uniphase common stock valued at $98.7 million (including $9.5 million
related to deferred compensation on unvested options).
E-TEK DYNAMICS, INC.
On June 30, 2000, the Company completed the acquisition of E-TEK, a
designer and manufacturer of high quality components and modules for fiber optic
systems. The transaction was accounted for as a purchase and accordingly, the
accompanying statements of operations include the results of E-TEK subsequent to
the acquisition date. The merger agreement provided for the exchange of 2.2
shares of the Company's common stock for each common share and outstanding
option of E-TEK. The total purchase price of $17,506.4 million included
consideration of 150.1 million shares of the Company's common stock, which
includes 0.8 million exchangeable shares of its subsidiary, JDS Uniphase Canada,
Ltd., each of which is exchangeable for one share of its common stock, the
issuance of options to purchase 23.2 million shares valued at $2,005.2 million
in exchange for E-TEK options, the issuance of 0.5 million common shares valued
at $45.5 million in exchange for E-TEK shares to be issued under E-TEK's
employee stock purchase plan, $53.9 million of cash, and estimated direct
transaction costs of $32.3 million.
The total purchase cost of E-TEK is as follows (in millions):
<Table>
Value of securities issued.................................. $15,369.3
Assumption of options....................................... 2,005.4
Cash consideration.......................................... 53.9
Assumption of employee stock purchase plan.................. 45.5
---------
Total consideration....................................... 17,474.1
Direct transactions costs and expenses...................... 32.3
---------
Total purchase cost....................................... $17,506.4
=========
</Table>
76
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation is as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 395.0
Marketable equity investments............................... 950.0
Intangible assets acquired:
Developed technology:
Existing technology.................................... 248.7
Core technology........................................ 168.5
Trademark and tradename................................... 60.4
Assembled workforce....................................... 10.7
In-process research and development......................... 250.6
Goodwill.................................................... 15,422.5
---------
Total purchase price allocation............................. $17,506.4
=========
</Table>
Tangible net assets acquired included cash, accounts receivable,
inventories and fixed assets (including an adjustment to write-up inventory of
E-TEK to fair value by $48.6 million). Liabilities assumed principally included
accounts payable, accrued compensation and accrued expenses. Goodwill and
intangible assets acquired are each being amortized on a straight-line basis
over estimated useful lives ranging from three to five years.
A portion of the purchase price has been allocated to write-up the equity
investments of E-TEK to a fair value of $950.0 million. The fair value includes
a $932 million increase to E-TEK's investment of ADVA, which is accounted for
under the equity method of accounting. The increase represents the fair value of
the Company's investment, over the net assets of ADVA, and is being amortized on
a straight-line basis over the estimated life of 5 years.
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by E-TEK concerning
developmental products, their stage of development, the time and resources
needed to complete them, and, if applicable, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
developed technology and IPR&D.
Where developmental projects had reached technological feasibility, they
were classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using discount rates ranging from 12 percent to 20 percent.
Discount rates were determined after consideration of E-TEK's weighted average
cost of capital and the weighted average return on assets. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets.
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquired existing technology, which was comprised of products that are
already technologically feasible, includes products in most of E-TEK's product
line. These include wavelength division multiplexing ("WDM") components and
modules, isolators, couplers, and micro-optic integrated components. The Company
is amortizing the acquired existing technology of approximately $248.7 million
on a straight-line basis over an average estimated remaining useful life of 3
years.
The acquired core technology represented E-TEK trade secrets and patents
developed through years of experience in design, package, and manufacture of
passive components for fiber optic telecommunication networks. E-TEK's products
are designed for established terrestrial and submarine long-haul applications,
as well as emerging short-haul applications, such as metropolitan area networks.
This proprietary know-how can be leveraged by E-TEK to develop new and improved
products and manufacturing processes. The Company is amortizing the acquired
core technology of approximately $168.5 million on a straight-line basis over an
average estimated remaining useful life of 5 years.
The trademarks and tradenames include the E-TEK trademark and tradename as
well as all branded E-TEK products, such as E-TEK(TM), Unifuse(TM), Kaifa(TM)
and TIGRA(TM). The Company is amortizing the trademark and tradenames of
approximately $60.4 million on a straight-line basis over an estimated remaining
useful life of 5 years.
The acquired assembled workforce was comprised of over 3,300 skilled
employees across E-TEK's Executive, Research and Development, Manufacturing,
Supervisor/Manager, and Sales and Marketing groups. The Company expects to
amortize the value assigned to the assembled workforce of approximately $10.7
million on a straight-line basis over an estimated remaining useful life of 3 to
5 years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of 5 years.
FUJIAN CASIX LASER, INC.
On April 29, 2000, the Company acquired Fujian Casix Laser Inc ("Casix"), a
supplier of crystals, fiber optic components and optics for telecommunications
networks, for $60 million in cash. Casix is based in Fuzhou, Fujian, China.
Casix's key technologies consist principally of fiberoptic component processing
and precision assembly; optical design, fabrication and coating; and advanced
crystal growth and processing. The transaction was accounted for as a purchase,
and accordingly, the accompanying financial statements include the results of
operations of Casix subsequent to the acquisition date. The purchase price
allocation included tangible net assets of $11.4 million and intangible assets
(primarily goodwill) of $48.6 million that are being amortized over a five-year
period.
CRONOS INTEGRATED MICROSYSTEMS, INC.
On April 19, 2000, the Company acquired Cronos Integrated Microsystems,
Inc. ("Cronos"), a provider of optical micro-electro-mechanical systems ("MEMS")
components and component technology to the fiber optic communications market.
The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of Cronos
subsequent to the acquisition date. The total purchase price of $565.3 million
included consideration of 6.3 million shares of JDS Uniphase common stock, the
issuance of options to purchase 0.2 million shares valued at $15.7 million in
exchange for Cronos options and estimated direct transaction costs of $1.1
million.
78
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total purchase cost of Cronos is as follows (in millions):
<Table>
Value of securities issued.................................. $548.5
Assumption of options....................................... 15.7
------
Total consideration.................................. 564.2
Direct transaction costs and expenses....................... 1.1
------
Total purchase cost.................................. $565.3
======
</Table>
The allocation of the purchase price is as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 1.0
Intangible assets acquired:
Developed technology...................................... 8.0
Core technology........................................... 4.1
Assembled workforce....................................... 1.8
Goodwill.................................................... 544.1
In-process research and development......................... 6.3
------
Total purchase price allocation...................... $565.3
======
</Table>
Tangible net assets acquired included cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally included accounts
payable, accrued compensation and accrued expenses. Goodwill and intangible
assets acquired are each being amortized on a straight-line basis over estimated
useful lives ranging from three to five years.
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by Cronos concerning
developmental products, their stage of development, the time and resources
needed to complete them, and, if applicable, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
developed technology and IPR&D.
Where development projects had reached technological feasibility, they were
classified as developed technology and the value assigned to developed
technology was capitalized. Where the development projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the transaction. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using discount rates ranging from 12 percent to 20 percent.
Discount rates were determined after consideration of Cronos weighted average
cost of capital and the weighted average return on assets. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets.
79
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquired existing technology, which was comprised of products that are
already technologically feasible, includes products in the following areas:
relays and optical communication cross connects. The Company is amortizing the
acquired existing technology of approximately $8.0 million on a straight-line
basis over an average estimated remaining useful life of 5 years.
The acquired core technology represents Cronos trade secrets and patents
developed through years of experience designing and manufacturing
micro-electromechanical systems components for fiber optic and RF
telecommunication networks. This knowledge can be leveraged by Cronos to develop
new and improved products and manufacturing processes. The Company is amortizing
the acquired core technology of approximately $4.1 million on a straight-line
basis over an average estimated remaining useful life of 5 years.
The acquired assembled workforce was comprised of approximately 72 skilled
employees across Cronos Sales and Marketing, Management, Supervision, Quality &
Training, General & Administrative, and Engineering groups. The Company is
amortizing the value assigned to the assembled workforce of approximately $1.8
million on a straight-line basis over an estimated remaining useful life of 3
years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of 5 years.
OPTICAL COATING LABORATORY, INC.
On February 4, 2000, the Company acquired OCLI, a manufacturer of optical
thin film coatings and components used to control and enhance light propagation
to achieve specific effects such as reflection, refraction, absorption and
wavelength separation. The transaction was accounted for as a purchase and
accordingly, the accompanying financial statements include the results of
operations of OCLI subsequent to the acquisition date. The total purchase price
of $2,707.5 million included consideration of 54.0 million shares of JDS
Uniphase common stock, the issuance of options to purchase 6.4 million shares
valued at $267.2 million in exchange for OCLI options and direct transaction
costs of $8.2 million.
The total purchase cost of OCLI is as follows (in millions):
<Table>
Value of securities issued.................................. $2,432.1
Assumption of options....................................... 267.2
--------
Total consideration.................................. 2,699.3
Direct transaction costs and expenses....................... 8.2
--------
Total purchase cost.................................. $2,707.5
========
</Table>
80
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation was as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 253.2
Intangible assets acquired:
Developed technology:
Telecommunications..................................... 115.1
Flex Products.......................................... 92.2
Applied Photonics...................................... 1.0
Information Industries................................. 23.9
Proprietary know-how...................................... 161.9
Trademark and tradename................................... 38.5
Assembled workforce....................................... 14.3
In-process research and development......................... 84.1
Goodwill.................................................... 1,927.4
Deferred tax liabilities.................................... (4.1)
--------
Total purchase price allocation...................... $2,707.5
========
</Table>
Tangible net assets acquired included cash, accounts receivable,
inventories and fixed assets (including an adjustment to write-up property and
equipment of OCLI to fair value by $28.0 million). Liabilities assumed
principally included accounts payable, accrued compensation and accrued
expenses. Goodwill and intangible assets acquired are each being amortized on a
straight-line basis over estimated useful lives ranging from six to fifteen
years.
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by OCLI concerning developmental
products, their stage of development, the time and resources needed to complete
them, and, if applicable, their expected income generating ability, target
markets and associated risks. The Income Approach, which includes an analysis of
the markets, cash flows and risks associated with achieving such cash flows, was
the primary technique utilized in valuing the developed technology and IPR&D.
Where developmental projects had reached technological feasibility, they
were classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using discount rates ranging from 18 percent to 25 percent.
Discount rates were determined after consideration of OCLI's weighted average
cost of capital and the weighted average return on assets. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets.
The acquired existing technology, which was comprised of products that are
already technologically feasible, includes products that are manufactured and
marketed by OCLI's Telecommunications, Flex
81
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Products, Applied Photonics, and Information Industries groups. The Company is
amortizing the acquired existing technology of approximately $232.2 million on a
straight-line basis over an average estimated remaining useful life of 8.2
years.
The acquired proprietary know-how represents OCLI trade secrets and patents
developed through years of experience designing and manufacturing thin film
products. This know-how enables OCLI to develop new and improve existing thin
film products, processes and manufacturing equipment, thereby providing OCLI
with a distinct advantage over its competitors and a reputation for
technological superiority in the industry. The Company is amortizing the
proprietary know-how of approximately $161.9 million on a straight-line basis
over an average estimated remaining useful life of 10.4 years
The trademarks and tradenames include the OCLI trademark and tradename as
well as all branded OCLI products such as GlareGuard(R) and processes such as
MetaMode(R). The Company is amortizing the trademark and tradenames of
approximately $38.5 million on a straight-line basis over an estimated remaining
useful life of 10 years.
The acquired assembled workforce was comprised of over 1,400 skilled
employees across OCLI's General and Administration, Science and Technology,
Sales and Marketing, and Manufacturing groups. The Company is amortizing the
value assigned to the assembled workforce of approximately $14.3 million on a
straight-line basis over an estimated remaining useful life of 6 years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of 7.2 years.
INTEGRIERTE OPTIK GMBH & CO. KG
In January 2000, the Company acquired the remaining 49 percent minority
interest in Integrierte Optik GmbH & Co. KG ("IOT"), a joint venture of JDS
Uniphase and the Schott Group, for $12.6 million in cash in a transaction
accounted for as a purchase. Prior to the transaction, IOT's balance sheet and
results of operations were consolidated with the Company, with appropriate
adjustments to reflect minority interest of 49 percent. As a result of the
transaction, the Company's ownership interest increased to 100 percent and the
minority interest adjustments have been discontinued. IOT manufactures passive
optical splitters for fiber optic network applications in cable plants and
transmission networks. The purchase price allocation included tangible net
assets of $2.9 million and intangible assets (including goodwill) of $9.7
million that are being amortized over a five-year period.
OPREL TECHNOLOGIES, INC.
In December 1999, the Company acquired Oprel Technologies, Inc. ("OPREL"),
a developer of optical amplifiers, test equipment and optoelectronic packaging,
located in Nepean, Ontario. The transaction was accounted for as a purchase and
accordingly, the accompanying financial statements include the results of
operations of OPREL subsequent to the acquisition date. The Company paid $9.3
million in cash and issued a total of 0.2 million exchangeable shares of its
subsidiary, JDS Uniphase Canada Ltd., each of which is exchangeable for one
share of common stock. The total purchase cost was $27.7 million. The purchase
price allocation included net tangible assets of $1.4 million and intangible
assets (including goodwill) of $26.3 million that are expected to be amortized
over a five-year period.
SIFAM LIMITED
In December 1999, the Company acquired SIFAM Limited ("SIFAM"), a supplier
of fused components for fiber optic telecommunications networks, which is based
in the United Kingdom, for $97.6 million in cash. SIFAM products, which included
couplers, wavelength division multiplexers and gain flattening filters, are used
for advanced applications in optical amplifiers and network monitoring. The
transaction was
82
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounted for as a purchase and accordingly, the accompanying financial
statements include the results of operations of SIFAM subsequent to the
acquisition date.
The allocation of the purchase price is as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 4.3
Intangible assets acquired:
Developed technology...................................... 27.0
Trade secrets and patents................................. 6.1
Assembled workforce....................................... 0.6
Goodwill.................................................... 70.1
In-process research and development......................... 3.0
Deferred tax liabilities.................................... (13.5)
------
Total purchase price allocation...................... $ 97.6
======
</Table>
Tangible net assets acquired included cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally included accounts
payable, accrued compensation and accrued expenses. Goodwill and intangible
assets acquired are each being amortized on a straight-line basis over estimated
useful lives ranging from three to five years.
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by SIFAM concerning
developmental products, their stage of development, the time and resources
needed to complete them, and, if applicable, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
developed technology and IPR&D.
Where development projects had reached technological feasibility, they were
classified as developed technology and the value assigned to developed
technology was capitalized. Where the development projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the transaction. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using discount rates ranging from 14 percent to 18 percent.
Discount rates were determined after consideration of SIFAM's weighted average
cost of capital and the weighted average return on assets. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets.
The acquired existing technology, which was comprised of products that are
already technologically feasible, includes products in the following areas:
fused couplers and attenuators, pump/signal wavelength division multiplexers,
polished products (polarizers, variable ratio couplers), and gain flattening
filters. The Company is amortizing the acquired existing technology of
approximately $27.0 million on a straight-line basis over an average estimated
remaining useful life of 5 years.
83
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquired core technology represents SIFAM trade secrets and patents
developed through years of experience designing and manufacturing fused
components for fiberoptic telecommunication networks. This knowledge can be
leveraged by SIFAM to develop new and improved products and manufacturing
processes. The Company is amortizing the acquired core technology of
approximately $6.1 million on a straight-line basis over an average estimated
remaining useful life of 5 years.
The acquired assembled workforce was comprised of approximately 50 skilled
employees across SIFAM's Sales and Marketing, Management, Supervision, Quality &
Training, General & Administrative, and Engineering groups. The Company is
amortizing the value assigned to the assembled workforce of approximately $0.6
million on a straight-line basis over an estimated remaining useful life of 3
years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of 5 years.
EPITAXX, INC.
In November 1999, the Company acquired EPITAXX, Inc. ("EPITAXX"), a
supplier of optical detectors and receivers for fiberoptic telecommunications
and cable televisions networks. The transaction was accounted for as a purchase
and accordingly, the accompanying financial statements include the results of
operations of EPITAXX subsequent to the acquisition date. The Company issued
cash in the amount of $9.3 million and a total of approximately 9.0 million
shares of common stock in exchange for all of the outstanding shares of EPITAXX
common stock. Outstanding options to acquire shares of EPITAXX common stock were
converted into options to purchase shares of the Company's common stock at the
same exchange ratio. The total purchase cost of EPITAXX is as follows (in
millions):
<Table>
Value of securities issued.................................. $429.5
Assumption of options....................................... 61.9
------
Total equity consideration.................................. 491.4
Cash paid to seller......................................... 9.3
Direct transaction costs and expenses....................... 1.0
------
Total purchase cost.................................. $501.7
======
</Table>
The allocation of the purchase price is as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 14.2
Intangible assets acquired:
Developed technology...................................... 63.4
Trademark and tradename................................... 5.4
Assembled workforce....................................... 2.9
Goodwill.................................................... 397.9
In-process research and development......................... 16.7
Deferred tax liabilities.................................... 1.2
------
Total purchase price allocation...................... $501.7
======
</Table>
Tangible net assets acquired included cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally included accounts
payable, accrued compensation, accrued expenses, and Industrial Revenue Bonds.
Goodwill and intangible assets acquired are each being amortized on a
straight-line basis over estimated useful lives ranging from four to seven
years.
84
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by EPITAXX concerning
developmental products, their stage of development, the time and resources
needed to complete them, and, if applicable, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
developed technology and IPR&D.
Where development projects had reached technological feasibility, they were
classified as developed technology and the value assigned to developed
technology was capitalized. Where the development projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, the Company considered, among other factors, the
importance of each project to the overall development plan projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present value
using discount rates ranging from 12 percent to 18 percent. Discount rates were
determined after consideration of EPITAXX's weighted average cost of capital and
the weighted average return on assets. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets.
The acquired existing technology, which was comprised of products that are
already technologically feasible, includes products in the following areas: high
speed receivers for the telecommunications market, optical network monitoring,
and optical detectors/receivers for access/datacom applications and cable
television fiberoptic networks. The Company is amortizing the acquired existing
technology of approximately $63.4 million on a straight-line basis over an
average estimated remaining useful life of 7 years.
The trademarks and tradenames include the EPITAXX trademark and tradename.
The Company is amortizing the trademark and tradenames of approximately $5.4
million on a straight-line basis over an estimated remaining useful life of 7
years.
The acquired assembled workforce was comprised of approximately 400 skilled
employees across EPITAXX's Executive, Research and Development, Manufacturing,
Quality Assurance, Sales and Marketing, and General and Administrative groups.
The Company is amortizing the value assigned to the assembled workforce of
approximately $2.9 million on a straight-line basis over an estimated remaining
useful life of 4 years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of 7 years.
RAMAR CORPORATION
In October 1999, the Company acquired Ramar Corporation ("Ramar") of
Northborough, Massachusetts for $1.0 million in cash and convertible debt as
described below, in a transaction accounted for as a purchase and accordingly,
the accompanying financial statements include the results of operations of Ramar
subsequent to the acquisition date. Ramar designs, develops and manufactures
lithium-niobate products for telecommunications applications. The convertible
debt was composed of $3.5 million in demand obligations and two
performance-based instruments totaling $1.0 million that become due upon
achieving certain milestones through October 2001. The convertible debt bears
interest at 5.54 percent per annum and the
85
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal can be exchanged for newly issued shares of common stock at a price of
$27.961 per share. The total purchase cost was $4.5 million. The purchase price
allocation included net tangible assets of $0.2 million and intangible assets
(including goodwill) of $4.3 million (net of deferred tax) that are being
amortized over a five year period. During 2001, $1.4 million of debt was
converted into 0.1 million shares of common stock. Convertible debt of $2.1
million is included in other current liabilities.
ACQUISITION OF AFC TECHNOLOGIES, INC.
In August 1999, the Company acquired AFC Technologies, Inc. ("AFC") of
Ottawa, Canada for $22.0 million in cash and common stock of $17.5 million in a
transaction accounted for as a purchase and accordingly, the accompanying
financial statements include the results of operations of AFC subsequent to the
acquisition date. AFC designs, develops and manufactures fiber amplifiers for
telecommunications applications. The purchase price allocation included net
tangible assets of $1.3 million and intangible assets (including goodwill) of
$38.2 million that are being amortized over a five-year period.
JDS FITEL
Effective June 30, 1999, the Company combined its operations with JDS FITEL
Inc. of Ottawa, Canada in a transaction accounted for as a purchase.
Accordingly, the accompanying financial statements include the results of
operations of JDS FITEL subsequent to the acquisition date. JDS FITEL primarily
manufactures passive products that include components and modules that route and
guide optical signals transmitted through a fiberoptic network. The total
purchase price of $3,496.7 million includes the issuance of common shares or
Exchangeable Shares of JDS Uniphase Canada Ltd. for all of the outstanding JDS
FITEL common shares based on the outstanding JDS FITEL common shares on June 30,
1999, the exchange ratio of 2.0342 of a JDS Uniphase share of common stock or
2.0342 of an Exchangeable Share of JDS Uniphase Canada Ltd. for each JDS FITEL
common share and an average market price per JDS Uniphase common share of
$20.428 per share. The average market price per JDS Uniphase common share is
based on the average closing price for a range of trading days around the
announcement date (January 28, 1999) of the merger. In addition, JDS Uniphase
issued options to purchase 26.4 million JDS Uniphase common shares in exchange
for outstanding JDS FITEL options with the number of shares and the exercise
price appropriately adjusted by the exchange ratio. The value of the options, as
well as direct transaction expenses of $12.0 million, have been included as a
part of the total purchase cost. In addition, the Company granted options to
purchase approximately 27.2 million shares of JDS Uniphase common shares to
certain former JDS FITEL employees subsequent to the effective date of the
merger.
The total purchase cost of the JDS FITEL merger was as follows (in
millions):
<Table>
Value of securities issued.................................. $3,263.1
Assumption of JDS FITEL options............................. 221.6
--------
Total consideration....................................... 3,484.7
Direct transaction costs and expenses....................... 12.0
--------
Total purchase cost....................................... $3,496.7
========
</Table>
86
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was allocated as follows (in millions):
<Table>
Tangible net assets acquired................................ $ 244.8
Intangible assets acquired:
Developed technology...................................... 490.5
Trademark and tradename................................... 348.0
Assembled workforce....................................... 19.2
Goodwill.................................................... 2,501.1
In-process research and development......................... 210.4
Deferred tax liabilities.................................... (317.3)
--------
Total purchase price allocation...................... $3,496.7
========
</Table>
Tangible net assets acquired included $47.4 million of cash acquired from
JDS FITEL. Tangible net assets of JDS FITEL also included short-term
investments, accounts receivable, inventories and fixed assets. Liabilities
assumed principally included accounts payable, accrued compensation and accrued
expenses. Goodwill and intangible assets acquired are each being amortized on a
straight-line basis over estimated useful lives of five years.
A portion of the purchase price has been allocated to developed technology
and IPR&D. Developed technology and IPR&D were identified and valued through
extensive interviews, analysis of data provided by JDS FITEL concerning
developmental products, their stage of development, the time and resources
needed to complete them, and, if applicable, their expected income generating
ability, target markets and associated risks. The Income Approach, which
includes an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
developed technology and IPR&D.
Where developmental projects had reached technological feasibility, they
were classified as developed technology and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPR&D and charged to expense upon closing of the merger. The
nature of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPR&D, JDS Uniphase considered, among other factors, the
importance of each project to the overall development plan projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present value
using a discount rate of 27 percent. This discount rate was determined after
consideration of JDS FITEL's weighted average cost of capital and the weighted
average return on assets. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, anticipated levels of market acceptance and penetration, market
growth rates and risks related to the impact of potential changes in future
target markets.
The IPR&D relates to sophisticated optical components and modules that
manage light transmission through today's most advanced telecommunications
systems. The IPR&D is comprised of four main categories: (i) Thermo Optic
Waveguide Attenuators, (ii) Solid State Switch, (iii) 50 GHz Wavelength Division
Multiplexing ("WDM"), and (iv) Erbium Doped Fiber Amplifiers.
BROADBAND COMMUNICATION PRODUCTS, INC.
On November 25, 1998, the Company acquired BCP of Melbourne, Florida in a
tax-free reorganization that was accounted for as a pooling of interests. BCP
manufactures high-speed and high-bandwidth fiber optic
87
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products including transmitters, receivers and multiplexers used to extend the
reach of fiber optic transmission into metropolitan and local access networks.
The Company exchanged 5.8 million shares of JDS Uniphase common stock and
reserved 3.3 million shares for BCP options assumed by the Company. Merger
related expenses of approximately $6.0 million are included in merger and other
expenses in the Statements of Operations. Separate unaudited net sales and
related net loss amounts of the merged entities are presented in the following
table (in millions).
<Table>
<Caption>
JUNE 30,
1999
--------
Net sales:
JDS Uniphase through September 30, 1998................... $ 54.2
BCP through September 30, 1998............................ 3.2
JDS Uniphase subsequent to September 30, 1998............. 225.4
-------
Net sales as reported.................................. $ 282.8
=======
Net loss:
JDS Uniphase through September 30, 1998................... $ 7.6
BCP through September 30, 1998............................ 0.6
JDS Uniphase subsequent to September 30, 1998............. (179.2)
-------
Net loss as reported................................... $(171.1)
=======
</Table>
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 was
composed of a $1.93 million demand obligation and two performance-based
instruments totaling $0.8 million that became due upon achieving certain
milestones through February 2000. The convertible debt bore interest at 5.48
percent and principal could be exchanged for newly issued shares of Uniphase
common stock at a price of $6.89 per share. The convertible debt was secured by
a letter of credit issued against the Company's unused revolving bank line of
credit until February 1999, when the holder tendered the $1.93 million
obligation and a performance-based instrument valued at $0.5 million for 359,920
shares of common stock.
UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding the charge for acquired in-process
research and development, as if the acquisition of SDL (combining SDL with PIRI,
Veritech and Queensgate), E-TEK, OCLI and JDS FITEL had occurred at the
beginning of 1999 and does not purport to be indicative of what would have
occurred had the acquisition been made as of the beginning of 1999 or of results
which may occur in the future. The pro forma 2001, 2000 and 1999 results of
operations combines the consolidated results of operations of the Company,
excluding the charge for acquired in-process research and development
attributable to SDL, E-TEK, OCLI and JDS FITEL, for the years ended June 30,
2001, 2000 and 1999 with the historical results of operations of SDL, E-TEK,
OCLI, and JDS FITEL for the years ended June 30 2001, 2000 and 1999, June 30,
2000 and 1999, April 30, 2000 and 1999, and May 31, 2000, respectively. The pro
forma 2001, 2000 and 1999 results exclude
88
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the effect of other acquisitions, as the impact to the results of operations for
2001, 2000 and 1999 would not be materially different from those shown below (in
millions, except per share data).
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Net sales........................................ $ 3,583.7 $ 2,238.5 $ 1,172.2
Net loss......................................... $(60,764.6) $(11,954.2) $(12,364.1)
Loss per share................................... $ (46.79) $ (10.24) $ (11.79)
</Table>
NOTE 11. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
During 2001, JDS Uniphase changed the structure of its internal
organization following the acquisition of SDL, Inc. ("SDL"), which became
effective February 13, 2001 (see Note 10). Segment information for the prior
years has been restated to conform to the current year's presentation.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker as defined by Statement of Financial Accounting Standards
("SFAS") No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating profits before interest, taxes, and certain purchase accounting
related costs.
JDS Uniphase designs, develops, manufactures and markets optical components
and modules at various levels of integration. The reportable segments are each
managed separately because they manufacture and distribute distinct products
with different production processes. The Company views its business as having
two principal operating segments: (i) Amplification and Transmission Group, and
(ii) WDM, Switching and Thin Film Filters Group. The Amplification and
Transmission Group consists primarily of source lasers, pump lasers, pump
modules, external modulators, transmitters, transceivers, optical photodetectors
and receivers, and optical amplifier products used in telecommunications and
cable television ("CATV") applications. The WDM, Switching and Thin Film Filters
Group includes wavelength division multiplexers ("WDM"), isolators, WDM
couplers, monitor tap couplers, gratings, circulators, optical switches, tunable
filters, thin film filters, micro-electro-mechanical-systems, instruments,
waveguides, switches, industrial lasers, and optical display and projection
products. The Company's other operating segments, which are below the
quantitative threshold defined by SFAS 131, are disclosed in the "all other"
category and consist of internal manufacturing automation products and certain
unallocated corporate-level operating expenses. All of the Company's products
are sold directly to original equipment manufacturers and industrial
distributors throughout the world.
Where practicable, the Company allocates corporate sales, marketing,
finance and administration expenses to operating segments, primarily as a
percentage of net sales. Certain corporate-level operating expenses (primarily
charges originating from purchased intangibles, activity related to equity
method investments, gain on sale of subsidiary, loss on sale of available for
sale investments, other expenses and acquired-in process research and
development expenses) are not allocated to operating segments. In addition, the
Company does not allocate income taxes, non-operating income and expenses or
specifically identifiable assets to its operating segments.
89
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intersegment sales are recorded at either cost or cost plus an agreed upon
intercompany profit on intersegment sales. Information on reportable segments is
as follows (in millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
-------------------------------
2001 2000 1999
---------- -------- -------
Amplification and Transmission:
Shipments................................................. $ 1,219.8 $ 628.9 $ 224.7
Intersegment sales........................................ (27.2) (4.8) --
---------- -------- -------
Net sales to external customers........................... $ 1,192.6 $ 624.1 $ 224.7
Operating income.......................................... $ 82.7 $ 162.2 $ 72.6
WDM, Switching and Thin Film Filters:
Shipments................................................. $ 2,147.6 $ 880.0 $ 58.1
Intersegment sales........................................ (100.2) (73.7) --
---------- -------- -------
Net sales to external customers........................... $ 2,047.4 $ 806.3 $ 58.1
Operating income.......................................... $ 198.0 $ 298.0 $ (0.6)
Net sales by reportable segments.......................... $ 3,240.0 $1,430.3 $ 282.8
All other................................................. (7.2) 0.1 --
---------- -------- -------
Net external sales........................................ $ 3,232.8 $1,430.4 $ 282.8
========== ======== =======
Operating income by reportable segments................... $ 280.7 $ 460.2 $ 72.0
All other operating income................................ (303.5) (0.5) (0.6)
Unallocated amounts:
Reduction of goodwill and other long-lived assets,
acquisition related charges and payroll taxes on stock
option exercises....................................... (56,324.6) (1,324.8) (224.6)
Gain on sale of subsidiary................................ 1,770.2 -- --
Loss on sale of available for sale investments............ (559.1) -- --
Reduction in fair value of available-for-sale
securities............................................. (522.1) -- --
Activity related to equity method investments............. (883.9) -- --
Interest and other income, net............................ 48.5 35.3 3.6
---------- -------- -------
Loss before income taxes.................................. $(56,493.8) $ (829.8) $(149.6)
========== ======== =======
</Table>
90
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JDS Uniphase operates primarily in two geographic regions: North America
and Europe. The following table shows sales and other identifiable assets by
geographic region (in millions):
<Table>
<Caption>
YEARS ENDED JUNE 30,
--------------------------------
2001 2000 1999
--------- --------- --------
NET SALES:
North America............................................. $ 2,189.4 $ 1,103.7 $ 168.5
Europe.................................................... 840.6 256.8 103.8
Rest of World............................................. 202.8 69.9 10.5
--------- --------- --------
Total net sales...................................... $ 3,232.8 $ 1,430.4 $ 282.8
Identifiable assets:
North America............................................. $17,287.8 $26,141.3 $3,994.5
Europe.................................................... 169.3 194.7 97.1
Rest of World............................................. 115.1 53.1 4.5
--------- --------- --------
Total assets......................................... $17,572.2 $26,389.1 $4,096.1
========= ========= ========
</Table>
Identifiable assets are those assets of the Company that are identified
with the operations of the corresponding geographic area. Identified intangible
assets and goodwill of $12.3 billion are included in North America assets.
During 2001, three customers, Nortel, Alcatel, and Lucent Technologies,
Inc., accounted for 14 percent, 12 percent and 10 percent of net sales,
respectively. During 2000, Lucent Technologies, Inc. and Nortel, accounted for
21 percent and 15 percent of net sales, respectively. During 1999, none of the
Company's customers exceeded 10 percent of net sales.
NOTE 12. SPECIAL CHARGES
<Table>
<Caption>
PROVISION
YEAR ENDED BALANCE AS OF
JUNE 30, CASH NON-CASH JUNE 30,
2001 PAYMENTS CHARGES 2001
---------- -------- ---------- -------------
Restructuring activities:
Worldwide workforce reduction................. $ 79.1 $(24.9) $ (11.1) $ 43.1
Facilities and equipment...................... 122.2 -- (122.2) --
Lease commitments............................. 63.0 (0.9) -- 62.1
--------- ------ ---------- ------
Restructuring charges........................... 264.3 (25.8) (133.3) 105.2
Reduction of goodwill and other long-lived
assets........................................ 50,085.0 -- (50,085.0) --
--------- ------ ---------- ------
Special charges................................. $50,349.3 $(25.8) $(50,218.3) $105.2
========= ====== ========== ======
</Table>
Since the beginning of calendar 2001, the Company and its industry have
experienced a dramatic downturn, the primary direct cause of which has been a
precipitous decrease in network deployment and capital spending by
telecommunications carriers. This decrease can be attributable to, among other
things: (a) network overcapacity, as bandwidth demand, while continuing to grow,
did not reach levels sufficient to sustain the pace of network deployment; (b)
constrained capital markets; and (c) other factors, including the general
inability of the CLECs to obtain sufficient access to established
telecommunications infrastructures and consolidation among the
telecommunications carriers. The result was a decrease in the overall demand for
new fiber optic networks and capacity increases on existing networks. In
response, carriers dramatically slowed their purchases of systems from the
Company's customers, which in turned slowed purchases of components and modules
from the Company's competitors and the Company. Moreover, as their sales
declined, the Company's customers moved to reduce their component and module
inventory levels. Consequently, the
91
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impact of the slowdown on the Company's business is magnified, as it faces
declining sales as the result of its customers' declining business and the
resulting adjustment to their inventory levels.
In April 2001, the Company initiated the Global Realignment Program (the
"Program"), under which it is restructuring its business in response to the
changes in its industry and customer demand and as part of its continuing
overall integration program. Consequently, this resulted in the Company
recording $264.3 million related to restructuring activities in the fourth
quarter of 2001. In addition, the Company recorded a reduction in goodwill and
other long-lived assets of approximately $50,085.0 million.
The Company also expects to incur further material restructuring costs in
the future as it continues to implement the Global Realignment Program. Such
charges will be recognized at the time the specific plans have been determined
in sufficient detail and have been approved by management.
The following paragraphs provide further details regarding the nature of
the special charges.
RESTRUCTURING ACTIVITIES
As of June 30, 2001, the Company had completed and approved plans to close
nine operations located in North America, Europe and Asia, vacate approximately
25 buildings or 1.2 million square feet of manufacturing and office space at
operations to be closed, as well as at continuing operations, and reduce its
workforce by approximately 9,000 employees.
WORLDWIDE WORKFORCE REDUCTION
As of June 30, 2001, the Company had recorded a charge of approximately
$79.1 million primarily related to severance and fringe benefits associated with
the reduction of 9,000 employees. Of the 9,000 terminations for which costs have
been accrued prior to June 30, 2001, approximately 8,200 were engaged in
manufacturing activities and approximately 7,100, 1,200, and 700 were from sites
located in North America, Europe and Asia, respectively. As of June 30, 2001,
approximately 6,100 employees had been terminated. The workforce reductions
began in the fourth quarter of 2001 and the Company expects them to be completed
by the second quarter of 2002. In addition, the Company incurred non-cash
severance charges of $11.1 million related to the modification of a former
executive's stock options (see Note 9).
Prior to the date of the financial statements, management with the
appropriate level of authority, approved and committed the Company to a plan of
termination which included the benefits terminated employees would receive.
Prior to June 30, 2001, the expected termination benefits were communicated to
employees in detail sufficient to enable them to determine the nature and
amounts of their individual severance benefits.
The remaining cash expenditures relating to workforce reduction and
termination agreements will be paid throughout the first and second quarters of
2002.
CONSOLIDATION OF EXCESS FACILITIES AND EQUIPMENT
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations being closed as of
June 30, 2001 are in Asheville, North Carolina; Bracknell, United Kingdom;
Freehold, New Jersey; Hillend, United Kingdom; Oxford, United Kingdom;
Richardson, Texas; Rochester, New York; Shunde, China and Taipei, Taiwan.
Property and equipment that was disposed or removed from operations
resulted in a charge of $122.2 million of which $22.3 million, $96.4 million and
$3.5 million, respectively, related to the Amplification and Transmission Group,
WDM, Switching and Thin Film Filters Group, and other operating segments. The
property and equipment write-down consisted primarily of leasehold improvements,
computer equipment and
92
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related software, production and engineering equipment, and office equipment,
furniture, and fixtures. In addition, the Company incurred a charge of $63.0
million for exiting and terminating leases primarily related to excess or closed
facilities with planned exit dates. The Company estimated the cost of exiting
and terminating the facility leases based on the contractual terms of the
agreements and then current real estate market conditions. The Company
determined that it would take approximately six to twenty-four months to
sublease the various properties that will be vacated in connection with the
Program.
Amounts related to the lease expense (net of anticipated sublease proceeds)
related to the consolidation of facilities will be paid over the respective
lease terms through 2015. The Company anticipates completing implementation of
its restructuring program during the next twelve months.
In addition, because the Company restructured certain of its businesses and
realigned its operations to focus on profit contribution, high-growth markets,
and core opportunities, it abandoned certain redundant products and product
platforms and reduced the workforce that had been valued in previous
acquisitions. In accordance with SFAS 121, the Company wrote the related
intangible assets down to their fair value, which was deemed to be zero, and
recorded a charge of $0.3 billion related to the reduction in purchased
intangibles and $3.1 billion related to the goodwill. The charge is included in
the "Reduction of goodwill and other long-lived assets" caption in the
Statements of Operations.
IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
The Company, as part of its review of financial results for 2001, also
performed an assessment of the carrying value of the Company's long-lived assets
to be held and used including significant amounts of goodwill and other
intangible assets recorded in connection with its various acquisitions. The
assessment was performed pursuant to SFAS 121 because of the significant
negative industry and economic trends affecting both the Company's current
operations and expected future sales as well as the general decline of
technology valuations. The conclusion of that assessment was that the decline in
market conditions within the Company's industry was significant and other than
temporary. As a result, the Company recorded charges of $39.8 billion and $6.9
billion to reduce goodwill and other long-lived assets during the third and
fourth quarters of 2001, respectively, based on the amount by which the carrying
amount of these assets exceeded their fair value. Of the total write down, $46.6
billion is related to the goodwill primarily associated with the acquisitions of
E-TEK, SDL, and OCLI with the balance of $0.1 billion relating to other
long-lived assets. The charge is included in the caption "Reduction of goodwill
and other long-lived assets" on the Statements of Operations. Fair value was
determined based on discounted future cash flows for the operating entities that
had separately identifiable cash flows. The cash flow periods used were five
years using annual growth rates of 15 percent to 60 percent, the discount rate
used was 13.0 percent in the third quarter of 2001 and 14.5 percent in the
fourth quarter of 2001, and the terminal values were estimated based upon
terminal growth rates of 7 percent. The assumptions supporting the estimated
future cash flows, including the discount rate and estimated terminal values,
reflect management's best estimates. The discount rate was based upon the
Company's weighted average cost of capital as adjusted for the risks associated
with its operations.
The Company believes it is likely there will be additional reductions in
goodwill in the quarter ending September 29, 2001 because of the decline in its
market capitalization since June 30, 2001, although such reductions in goodwill
may be based on an assessment of its long-lived assets pursuant to SFAS 121.
NOTE 13. SALE OF SUBSIDIARY
On February 13, 2001, the Company completed the sale of its Zurich,
Switzerland subsidiary to Nortel for 65.7 million shares of Nortel common stock
valued at $1,953.3 million, as well as up to an additional $500.0 million in
Nortel common stock payable to the extent Nortel purchases do not meet certain
levels under new and existing programs through December 31, 2003. After
adjusting for the net cost of the assets sold and for the expenses associated
with the divestiture, the Company realized a gain of $1,770.2 million. The
93
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Nortel common stock are being accounted for as available-for-sale
securities. The Company sold approximately 41.0 million shares resulting in a
realized loss of $559.1 million during 2001. (See Note 2).
NOTE 14. LITIGATION SETTLEMENT
On August 29, 2001, the Company settled certain claims relating primarily
to SDL's business operations for periods prior to February 13, 2001, the
effective date of the Company's merger with SDL. Under the settlement, the
Company paid the claimant $16.0 million in cash and issued 325,000 shares of
common stock valued at approximately $2.3 million which the Company has agreed
to register for resale. The Company may make an additional payment to the
claimant in cash or stock of up to $4.5 million one year after the initial
payment, depending on the value of the initial stock payment to the claimant at
the end of that year. In connection with this settlement the Company has
recorded a charge of approximately $22.8 million to "Selling, general and
administrative" expense in the Statement of Operations.
NOTE 15. UNAUDITED QUARTERLY RESULTS
The following table contains selected unaudited consolidated statement of
operations data for each quarter of years 2001 and 2000 (in millions).
<Table>
<Caption>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 2000 2000 2000 2000 2001 2001
--------- -------- -------- -------- --------- -------- ---------- ----------
Net sales....................... $ 230.1 $ 281.7 $ 394.6 $ 524.0 $ 786.5 $ 925.1 $ 920.1 $ 601.1
Cost of sales................... 125.2 139.2 202.1 285.2 436.7 449.8 494.2 926.0
------- ------- ------- ------- --------- -------- ---------- ----------
Gross profit.................. 104.9 142.5 192.5 238.8 349.8 475.3 425.9 (324.9)
Operating expenses:
Research and development...... 17.2 21.6 33.3 41.2 62.4 71.2 98.0 94.3
Selling, general, and
administrative.............. 27.9 33.8 49.1 62.1 116.2 105.7 440.8 155.4
Amortization of purchased
intangibles................. 172.9 185.1 249.6 289.3 1,107.4 1,104.1 2,120.2 1,055.3
Reduction of goodwill and
other long-lived assets..... -- -- -- -- -- -- 39,777.2 10,307.8
Restructuring charges......... -- -- -- -- -- -- -- 264.3
Acquired in-process research
and development............. -- 19.7 84.1 256.9 8.9 -- 383.7 0.6
------- ------- ------- ------- --------- -------- ---------- ----------
Total operating expenses........ 218.0 260.2 416.1 649.5 1,294.9 1,281.0 42,819.9 11,877.7
Loss from operations............ (113.1) (117.7) (223.6) (410.7) (945.1) (805.7) (42,394.0) (12,202.6)
Gain on sale of subsidiary...... -- -- -- -- -- -- 1,770.2 --
Activity related to equity
method investments............ -- -- -- -- (41.2) (52.3) (759.9) (30.5)
Interest and other income,
net........................... 5.5 10.7 10.0 9.1 13.6 12.2 4.6 (1,063.1)
------- ------- ------- ------- --------- -------- ---------- ----------
Loss before income taxes........ (107.6) (107.0) (213.6) (401.6) (972.7) (845.8) (41,379.1) (13,296.2)
Income tax expense (benefit).... 6.3 24.2 27.3 17.2 43.9 49.6 468.8 (934.2)
------- ------- ------- ------- --------- -------- ---------- ----------
Net loss........................ $(113.9) $(131.2) $(240.9) $(418.8) $(1,016.6) $ (895.4) $(41,847.9) $(12,362.0)
======= ======= ======= ======= ========= ======== ========== ==========
Loss per share(1):
Basic and diluted............. $ (0.17) $ (0.19) $ (0.32) $ (0.54) $ (1.07) $ (0.93) $ (36.63) $ (9.39)
</Table>
---------------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per common share information
may not equal the annual loss per common share.
94
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item is included in the Proposal One:
Elections of Directors, Directors and Executive Officers, and Section 16(a)
Beneficial Ownership Reporting Compliance sections of the Company's Proxy
Statement to be filed in connection with the Company's 2001 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Executive
Compensation and Related Information sections of the Company's Proxy Statement
to be filed in connection with the Company's 2001 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Security Ownership
of Certain Beneficial Owners and Management section of the Company's Proxy
Statement to be filed in connection with the Company's 2001 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Compensation
Committee Interlocks and Insider Participation and Certain Transactions sections
of the Company's Proxy Statement to be filed in connection with the Company's
2001 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements of the Company are included
in Item 8.
Consolidated Statements of Operations -- Years ended June 30, 2001, 2000
and 1999
Consolidated Balance Sheets -- June 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity -- Years ended June 30,
2001, 2000 and 1999
Consolidated Statements of Cash Flows -- Years ended June 30, 2001, 2000
and 1999
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as part of this annual
report. All other financial statement schedules have been omitted because they
are not applicable or are not required or the information required to be set
forth therein is included in the Company's consolidated financial statements set
forth in this Annual Report on Form 10-K and the notes thereto.
95
97
JDS UNIPHASE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS(2) DEDUCTION(1) PERIOD
----------- ------------ ---------- ----------- ------------ ----------
(IN MILLIONS)
Year ended June 30, 2001:
Allowance for doubtful accounts... $8.2 $26.4 $6.0 $0.3 $40.3
Year ended June 30, 2000:
Allowance for doubtful accounts... $1.1 $ 0.8 $6.3 $ -- $ 8.2
Year ended June 30, 1999:
Allowance for doubtful accounts... $0.8 $ 0.3 $0.5 $0.5 $ 1.1
</Table>
---------------
(1) Charges for uncollectible accounts, net of recoveries.
(2) Allowance assumed through the merger with SDL in 2001, OCLI, E-TEK, and
Epitaxx in 2000, and the acquisition of JDS FITEL in 1999.
(a)(3) Exhibits
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1(1) -- Restated Certificate of Incorporation.
3.2(2) -- Certificate of Designation.
3.3(3) -- Certificate of Designation.
3.4(4) -- Certificate of Designation.
3.5 -- Bylaws of the Company, as amended.
4.1(5) -- Fourth Amended and Restated Rights Agreement.
4.2(6) -- Exchangeable Share Provisions attaching to the exchangeable
shares of JDS Uniphase Canada Ltd. (formerly 3506967 Canada
Inc.).
4.3(7) -- Voting and Exchange Trust Agreement dated as of July 6, 1999
between the Company, JDS Uniphase Canada Ltd. and CIBC
Mellon Trust Company.
4.4(7) -- Exchangeable Share Support Agreement dated as of July 6,
1999 between the Company, JDS Uniphase Canada Ltd. and JDS
Uniphase Nova Scotia Company.
4.5 -- Fourth Amended and Restated JDS Uniphase Canada Ltd. Rights
Agreement.
4.6(7) -- Registration Rights Agreement dated as of July 6, 1999
between the Company, JDS Uniphase Canada Ltd. and The
Furukawa Electric Co., Ltd.
10.1(8) -- Amended and Restated 1993 Flexible Stock Incentive Plan.
10.2(9) -- Stockholder Agreement dated as of June 9, 1998, by and
between Uniphase Corporation, and Koninklijke Philips
Electronics N.V.
10.3(9) -- Series A Preferred Conversion and Redemption Agreement dated
as of June 9, 1998, by and between Uniphase Corporation and
Koninklijke Philips Electronics N.V.
10.4(10) -- 1998 Employee Stock Purchase Plan, as amended.
10.5(7) -- Support Agreement dated as of April 29, 1999, by and among
Uniphase Corporation, 3506967 Canada Inc., The Furukawa
Electric Company, Ltd., and JDS FITEL Inc.
10.9(11) -- Employment Agreement for Anthony R. Muller.
10.11(12) -- Retention and Change of Control Agreement for Jozef Straus,
Ph.D.
10.12 -- Employment Agreement for Mike Phillips
10.13 -- Employment Agreement for Don Scifires
</Table>
96
98
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.14 -- Change of Control Agreement for Don Scifires
10.15(13) -- Amended and restated 1999 Canadian Employee Stock Purchase
Plan
10.16 -- Transition Agreement for Don Scifires
10.17 -- Employment Agreement for Greg Dougherty
10.18 -- Change of Control Agreement for Greg Dougherty
10.19 -- Transition Agreement for Greg Dougherty
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst &Young LLP, Independent auditors.
24.1 -- Powers of Attorney (see page 99).
</Table>
---------------
(1) Incorporated by reference to exhibit 3.1 to the Company's Annual Report on
Form 10-K/A filed February 13, 2001.
(2) Incorporated by reference to exhibit 3.(i)(d) to the Company's Annual
Report of Form 10-K filed September 28, 1998.
(3) Incorporated by reference to exhibit 4.1 to the Company's Registration
Statement on Form S-3 filed July 14, 1999.
(4) Incorporated by reference to exhibit 10.3 to the Company's current Report
on Form 8-K filed June 24, 1998.
(5) Incorporated by reference to the Company's Registration Statement on Form
8-A 12G/A filed on February 13, 2001.
(6) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A filed on June 2, 1999.
(7) Incorporated by reference to exhibits 4.2, 4.3, 4.5 and 10.23,
respectively, to the Company's Annual Report on Form 10-K for the period
ending June 30, 1999.
(8) Incorporated by reference to exhibits filed with the Company's registration
statement on form S-8, file number 33-31722 filed with the Securities and
Exchange Commission on February 27, 1996.
(9) Incorporated by reference to the exhibit to the Company's Current Report on
Form 8-K filed June 24, 1998.
(10) Incorporated by reference to exhibit 10.4 to the Company's Annual Report on
Form 10-K/A filed on February 13, 2001.
(11) Incorporated by reference to exhibit 10.1 to the Company's quarterly report
on Form 10-Q for the period ended September 30, 1999.
(12) Incorporated by reference to exhibit 10.11 to the Company's Annual Report
on Form 10-K filed on September 28, 2000.
(13) Incorporated by reference to exhibit 10.14 to the Company's Annual Report
on Form 10-K/A filed on February 13, 2001.
97
99
(b) Reports on Form 8-K
<Table>
<Caption>
DATE OF REPORT ITEM REPORTED ON
-------------- ----------------
September 4, 2001 Regulation FD disclosure in connection with a
stockholder update delivered by the officers of the
Company on September 4, 2001 that included written
communication comprised of slides.
July 26, 2001 Regulation FD disclosure in connection with a
conference call delivered by the officers of the
Company on July 26, 2001.
July 24, 2001 Regulation FD disclosure in connection with a
stockholder update delivered by the officers of the
Company on July 24, 2001 that included written
communication comprised of slides
June 14, 2001 Regulation FD disclosure in connection with revised
guidance for future periods.
June 6, 2001 The plan of certain Board of Directors and Executive
Officers under Rule 10b5-1 of the Securities Exchange
Act of 1934, as amended, for trading in shares of
Registrant's common stock.
May 2, 2001 Regulation FD disclosure in connection with a
stockholder update delivered by the officers of the
Company on May 2, 2001 that included written
communication comprised of slides.
April 24, 2001 Regulation FD disclosure in connection with a
conference call delivered by the officers of the
Company on April 24, 2001.
</Table>
(c) Exhibit Index
See Exhibit index.
(d) Financial Statement Schedule
See Financial statement schedule set forth in (a)(2) above
98
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 17, 2001 JDS UNIPHASE CORPORATION
By: /s/ JOZEF STRAUS
------------------------------------
Jozef Straus, Ph.D.
Co-Chairman, Chief Executive
Officer, and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Anthony R. Muller his or her
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOZEF STRAUS Co-Chairman, Chief Executive September 17, 2001
------------------------------------------------ Officer, and President
Jozef Straus, Ph.D. (Principal Executive Officer)
/s/ DONALD R. SCIFRES Co-Chairman and Chief Strategy September 17, 2001
------------------------------------------------ Officer
Donald R. Scifres, Ph.D.
/s/ ANTHONY R. MULLER Executive Vice President, September 17, 2001
------------------------------------------------ Chief Financial Officer and
Anthony R. Muller Secretary
(Principal Financial and
Accounting Officer)
/s/ MARTIN A. KAPLAN Chairman September 17, 2001
------------------------------------------------
Martin A. Kaplan
/s/ BRUCE D. DAY Director September 17, 2001
------------------------------------------------
Bruce D. Day
/s/ ROBERT E. ENOS Director September 17, 2001
------------------------------------------------
Robert E. Enos
/s/ JOHN A. MACNAUGHTON Director September 17, 2001
------------------------------------------------
John A. MacNaughton
/s/ CASIMIR S. SKRZYPCZAK Director September 17, 2001
------------------------------------------------
Casimir S. Skrzypczak
</Table>
99
101
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER A. GUGLIELMI Director September 17, 2001
------------------------------------------------
Peter A. Guglielmi
/s/ DONALD J. LISTWIN Director September 17, 2001
------------------------------------------------
Donald J. Listwin
</Table>
100
102
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1(1) -- Restated Certificate of Incorporation.
3.2(2) -- Certificate of Designation.
3.3(3) -- Certificate of Designation.
3.4(4) -- Certificate of Designation.
3.5 -- Bylaws of the Company, as amended.
4.1(5) -- Fourth Amended and Restated Rights Agreement.
4.2(6) -- Exchangeable Share Provisions attaching to the exchangeable
shares of JDS Uniphase Canada Ltd. (formerly 3506967 Canada
Inc.).
4.3(7) -- Voting and Exchange Trust Agreement dated as of July 6, 1999
between the Company, JDS Uniphase Canada Ltd. and CIBC
Mellon Trust Company.
4.4(7) -- Exchangeable Share Support Agreement dated as of July 6,
1999 between the Company, JDS Uniphase Canada Ltd. and JDS
Uniphase Nova Scotia Company.
4.5 -- Fourth Amended and Restated JDS Uniphase Canada Ltd. Rights
Agreement.
4.6(7) -- Registration Rights Agreement dated as of July 6, 1999
between the Company, JDS Uniphase Canada Ltd. and The
Furukawa Electric Co., Ltd.
10.1(8) -- Amended and Restated 1993 Flexible Stock Incentive Plan.
10.2(9) -- Stockholder Agreement dated as of June 9, 1998, by and
between Uniphase Corporation, and Koninklijke Philips
Electronics N.V.
10.3(9) -- Series A Preferred Conversion and Redemption Agreement dated
as of June 9, 1998, by and between Uniphase Corporation and
Koninklijke Philips Electronics N.V.
10.4(10) -- 1998 Employee Stock Purchase Plan, as amended.
10.5(7) -- Support Agreement dated as of April 29, 1999, by and among
Uniphase Corporation, 3506967 Canada Inc., The Furukawa
Electric Company, Ltd., and JDS FITEL Inc.
10.9(11) -- Employment Agreement for Anthony R. Muller.
10.11(12) -- Retention and Change of Control Agreement for Jozef Straus,
Ph.D.
10.12 -- Employment Agreement for Mike Phillips
10.13 -- Employment Agreement for Don Scifires
10.14 -- Change of Control Agreement for Don Scifires
10.15(13) -- Amended and restated 1999 Canadian Employee Stock Purchase
Plan
10.16 -- Transition Agreement for Don Scifires
10.17 -- Employment Agreement for Greg Dougherty
10.18 -- Change of Control Agreement for Greg Dougherty
10.19 -- Transition Agreement for Greg Dougherty
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst &Young LLP, Independent auditors.
24.1 -- Powers of Attorney (see page 99).
</Table>
---------------
(1) Incorporated by reference to exhibit 3.1 to the Company's Annual Report on
Form 10-K/A filed February 13, 2001.
(2) Incorporated by reference to exhibit 3.(i)(d) to the Company's Annual
Report of Form 10-K filed September 28, 1998.
(3) Incorporated by reference to exhibit 4.1 to the Company's Registration
Statement on Form S-3 filed July 14, 1999.
103
(4) Incorporated by reference to exhibit 10.3 to the Company's current Report
on Form 8-K filed June 24, 1998.
(5) Incorporated by reference to the Company's Registration Statement on Form
8-A 12G/A filed on February 13, 2001.
(6) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A filed on June 2, 1999.
(7) Incorporated by reference to exhibits 4.2, 4.3, 4.5 and 10.23,
respectively, to the Company's Annual Report on Form 10-K for the period
ending June 30, 1999.
(8) Incorporated by reference to exhibits filed with the Company's registration
statement on form S-8, file number 33-31722 filed with the Securities and
Exchange Commission on February 27, 1996.
(9) Incorporated by reference to the exhibit to the Company's Current Report on
Form 8-K filed June 24, 1998.
(10) Incorporated by reference to exhibit 10.4 to the Company's Annual Report on
Form 10-K/A filed on February 13, 2001.
(11) Incorporated by reference to exhibit 10.1 to the Company's quarterly report
on Form 10-Q for the period ended September 30, 1999.
(12) Incorporated by reference to exhibit 10.11 to the Company's Annual Report
on Form 10-K filed on September 28, 2000.
(13) Incorporated by reference to exhibit 10.14 to the Company's Annual Report
on Form 10-K/A filed on February 13, 2001.