SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only
(As Permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
JDS Uniphase Corporation
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
[JDS Uniphase logo]
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
Notice of Annual Meeting of Stockholders
and Proxy Statement
2002 Annual Report
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR VOTE
ELECTRONICALLY VIA THE INTERNET OR TELEPHONE.
- --------------------------------------------------------------------------------
[JDS Uniphase logo]
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
October 3, 2002
Dear Stockholder:
I am pleased to invite you to attend JDS Uniphase Corporation's 2002 Annual
Meeting of Stockholders (the "Annual Meeting"), which will be held at our
corporate offices located at 1768 Automation Parkway, San Jose, California
95131, on October 31, 2002 at 8:30 a.m., Pacific Standard Time.
If you are unable to attend the Annual Meeting in person, you may listen to
a live audio webcast on our website at www.jdsu.com under "Investor Relations."
Details of the business to be conducted at the Annual Meeting are given in
the attached Notice of Annual Meeting of Stockholders and Proxy Statement. In
order to reduce costs, we have also included our fiscal 2002 Annual Report as
part of this document.
Your vote is important. Whether or not you plan to attend the Annual
Meeting, please complete, sign, date and promptly return the accompanying proxy
in the enclosed postage-prepaid envelope. You may also vote via telephone or
Internet, as outlined on the enclosed proxy card. If you vote via the Internet,
you can elect to access future proxy statements and annual reports on our
website.
Your Board of Directors recommends that you vote in favor of the two
proposals outlined in the Proxy Statement.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued support and interest in JDS Uniphase
Corporation. We look forward to seeing you at the Annual Meeting.
Sincerely,
/s/ Anthony R. Muller
Anthony R. Muller
Executive Vice President
Chief Financial Officer and Secretary
[JDS Uniphase logo]
JDS UNIPHASE CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 31, 2002
- --------------------------------------------------------------------------------
TIME 8:30 a.m., Pacific Standard Time, on October 31, 2002
LOCATION JDS Uniphase Corporation
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
PROPOSALS 1. To elect three Class III directors to serve until the 2005 Annual Meeting of
Stockholders and until their successors are elected and qualified.
2. To ratify the appointment of Ernst & Young LLP as JDS Uniphase
Corporation's independent auditors for the fiscal year ending June 30, 2003.
3. To consider such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.
These items of business are more fully described in the Proxy Statement which is
attached and made a part hereof.
RECORD DATE You are entitled to vote at the 2002 Annual Meeting of
Stockholders (the "Annual Meeting") and any adjournment or
postponement thereof if you were a stockholder at the close of
business on September 20, 2002.
VOTING Your vote is important. Whether or not you expect to attend the Annual Meeting,
you are urged to vote promptly to ensure your representation and the presence of
a quorum at the Annual Meeting. You may vote your shares by using the Internet
or the telephone. Instructions for using these services are set forth on the
enclosed proxy card. You may also vote your shares by marking, signing, dating
and returning the proxy card in the enclosed postage-prepaid envelope. If you
send in your proxy card and then decide to attend the Annual Meeting to vote
your shares in person, you may still do so. Your proxy is revocable in
accordance with the procedures set forth in the Proxy Statement.
By Order of the Board of Directors,
/s/ Anthony R. Muller
Anthony R. Muller
Executive Vice President
Chief Financial Officer and Secretary
San Jose, California
October 3, 2002
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
---------------------
PROXY STATEMENT
---------------------
GENERAL INFORMATION
Why am I receiving these proxy materials?
The Board of Directors (the "Board") of JDS Uniphase Corporation, a
Delaware corporation (the "Company"), is furnishing these proxy materials to you
in connection with the Company's 2002 Annual Meeting of Stockholders (the
"Annual Meeting"). The Annual Meeting will be held at our corporate offices
located at 1768 Automation Parkway, San Jose, California 95131, on October 31,
2002 at 8:30 a.m., Pacific Standard Time. You are invited to attend the Annual
Meeting and are entitled to and requested to vote on the proposals outlined in
this Proxy Statement.
What proposals will be voted on at the Annual Meeting?
There are two proposals scheduled to be voted on at the Annual Meeting:
1. To elect three Class III directors to serve until the 2005 Annual
Meeting of Stockholders and until their successors are elected and
qualified; and
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 2003.
As to any other business which may properly come before the Annual Meeting,
the persons named on the enclosed proxy card will vote according to their best
judgment. We do not know now of any other matters to be presented or acted upon
at the Annual Meeting.
What are the recommendations of the Company's Board of Directors?
The Board recommends that you vote "FOR" the election of the three Class
III directors and "FOR" the ratification of the appointment of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending June 30, 2003.
What is the record date and what does it mean?
The record date for the Annual Meeting is September 20, 2002. The record
date is established by the Board of Directors as required by Delaware law.
Holders of shares of the Company's common stock and holders of exchangeable
shares of JDS Uniphase Canada Ltd., a subsidiary of the Company, at the close of
business on the record date are entitled to receive notice of the Annual Meeting
and to vote at the Annual Meeting and any adjournments or postponements thereof.
What shares can I vote?
Each stockholder of the Company's common stock, par value $.001 per share
("Common Stock"), is entitled to one vote for each share of Common Stock owned
as of the record date, and CIBC Mellon Trust Company (the "Trustee"), the holder
of the Company's Special Voting Share, is entitled to one vote for each
exchangeable share of JDS Uniphase Canada Ltd., a subsidiary of the Company
("Exchangeable Shares"),
outstanding as of the record date (other than Exchangeable Shares owned by the
Company and its affiliates). Holders of Common Stock and the Special Voting
Share are collectively referred to as "Stockholders." Votes cast with respect to
Exchangeable Shares will be voted through the Special Voting Share by the
Trustee as directed by the holders of Exchangeable Shares, except votes cast
with respect to Exchangeable Shares whose holders request to vote directly in
person as proxy for the Trustee at the Annual Meeting.
At the record date, 1,260,753,769 shares of Common Stock were issued and
outstanding, one share of the Company's Special Voting Stock was issued and
outstanding, and 153,536,589 Exchangeable Shares were issued and outstanding
(excluding Exchangeable Shares owned by the Company and its affiliates which are
not voted). Each Exchangeable Share is exchangeable at any time, at the option
of its holder, for one share of the Company's Common Stock.
What is the voting requirement to approve each of the proposals?
For Proposal 1, election of directors, the three candidates receiving the
greatest number of affirmative votes of the votes attached to shares of Common
Stock and the Special Voting Share will be elected, provided a quorum is present
and voting. Proposal 2 will require the affirmative vote of a majority of the
votes attached to shares of Common Stock and the Special Voting Share, voting
together as a single class, present or represented by proxy and entitled to vote
at the Annual Meeting.
All shares of Common Stock and the Special Voting Share represented by
valid proxies will be voted in accordance with the instructions contained
therein. Votes with respect to Exchangeable Shares represented by valid voting
instructions received by the Trustee, will be cast by the Trustee in accordance
with those instructions. In the absence of instructions, proxies from holders of
Common Stock will be voted FOR Proposals 1 and 2. If no instructions are
received by the Trustee from a holder of Exchangeable Shares, the votes to which
such holder is entitled will not be exercised.
How do I vote my shares?
If you are a stockholder of record, you can give a proxy to be voted at the
Annual Meeting:
o by mailing the enclosed proxy card;
o over the telephone by calling a toll-free number; or
o electronically, using the Internet
The Internet and telephone voting procedures have been set up for your
convenience and are designed to authenticate Stockholders' identities, to allow
Stockholders to provide their voting instructions, and to confirm that their
instructions have been recorded properly. The Company believes the procedures
which have been put in place are consistent with the requirements of applicable
law. Specific instructions for Stockholders of record who wish to use the
Internet or telephone voting procedures are set forth on the enclosed proxy
card.
Who will tabulate the votes?
An automated system administered by ADP Investor Communication Services
will tabulate votes cast by proxy at the Annual Meeting and a representative of
the Company will tabulate votes cast in person at the Annual Meeting.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual
Stockholders are handled in a manner that protects your voting privacy. Your
vote will not be disclosed either within the Company or to third parties, except
(i) as necessary to meet applicable legal requirements, (ii) to allow for the
tabulation of votes and certification of the vote, or (iii) to facilitate a
successful proxy solicitation by the Board of Directors. Occasionally,
Stockholders provide written comments on their proxy cards, which are then
forwarded to the Company's management.
2
What are the quorum and voting requirements?
The presence, in person or by proxy, of the holders of a majority of the
shares of the Company's Common Stock and Exchangeable Shares entitled to vote is
necessary to constitute a quorum at the Annual Meeting. Under the General
Corporation Law of the State of Delaware, an abstaining vote and a broker
"non-vote" are counted as present and are, therefore, included for purposes of
determining whether a quorum of shares is present at a meeting. Broker
"non-votes" are not included in the tabulation of the voting results on the
election of directors or issues requiring approval of a majority of the shares
present or represented by proxy and entitled to vote at the Annual Meeting and,
therefore, do not have an effect on Proposals 1 and 2. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have the discretionary voting
instructions with respect to that item and has not received instructions from
the beneficial owner. Shares held by brokers who do not have discretionary
authority to vote on a particular matter and have not received voting
instructions from their customers are not counted or deemed to be present or
represented for purposes of determining whether Stockholders have approved that
matter.
With respect to Proposal 1, a plurality of the votes duly cast is required
for the election of directors (i.e., the nominees receiving the greatest number
of votes will be elected). Abstentions are not counted for purposes of the
election of directors.
With respect to Proposal 2 and any other matters (other than the election
of directors) on which Stockholders of the Company are entitled to vote, the
affirmative vote of the holders of a majority of the Stockholders' shares
present in person or represented by proxy and entitled to vote, is required. For
the purpose of determining whether the Stockholders have approved matters other
than the election of directors, abstentions are treated as shares present or
represented and voting, so abstaining has the same effect as a negative vote.
Can I change my vote after submitting my proxy?
You may revoke your proxy at any time before the final vote at the Annual
Meeting. You may do so by one of the following four ways:
o submitting another proxy card bearing a later date;
o sending a written notice of revocation to the Company's Corporate
Secretary at 1768 Automation Parkway, San Jose, California, 95131;
o submitting new voting instructions via telephone or the Internet; or
o attending AND voting in person at the Annual Meeting
If you hold Exchangeable Shares and you wish to direct the Trustee to cast
the votes attached to the Special Voting Share on your behalf, you should follow
carefully the instructions provided by the Trustee, which accompany this Proxy
Statement. The procedure for instructing the Trustee differs in certain respects
from the procedure for delivering a proxy, including the place for depositing
the instructions and the manner for revoking the proxy.
Who is paying for this proxy solicitation?
This Proxy Statement and the accompanying proxy were first sent by mail to
common stockholders, the Trustee for the Special Voting Share and holders of
Exchangeable Shares on or about October 3, 2002. The Company will bear the cost
of soliciting proxies, including preparation, assembly, printing and mailing of
the Proxy Statement. In addition, the Company will reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Proxies may be
solicited by certain of the Company's directors, officers and regular employees,
without additional compensation, either personally, by telephone, facsimile, or
telegram.
How can I find out the voting results?
The Company will announce the preliminary results at the Annual Meeting and
publish the final results in the Company's Quarterly Report on Form 10-Q for the
second quarter of fiscal 2003.
3
How do I receive electronic access to proxy materials for the current and future
annual meetings?
Stockholders who elected to receive the Proxy Statement and Annual Report
over the Internet will be receiving an e-mail on or about October 3, 2002 with
information on how to access stockholder information and instructions for voting
over the Internet. Stockholders of record may vote via the Internet until 11:59
p.m. Eastern Time, October 30, 2002.
If your shares are registered in the name of a brokerage firm and you have
not elected to receive your Proxy Statement and Annual Report over the Internet,
you may be eligible to vote your shares electronically over the Internet. A
large number of brokerage firms are participating in the ADP Investor
Communication Services ("ADP") online program, which provides eligible
Stockholders who receive a paper copy of this Proxy Statement the opportunity to
vote via the Internet. If your brokerage firm is participating in ADP's program,
your proxy card will provide instructions. If your proxy card does not reference
Internet information, please complete and return the proxy card in the
postage-paid envelope provided.
Stockholders can elect to view future proxy statements and annual reports
over the Internet instead of receiving paper copies. If you are a Stockholder of
record and would like to receive future stockholder materials electronically,
you can elect this option by following the instructions provided when you vote
your proxy over the Internet at www.ProxyVote.com.
By choosing to view future proxy statements and annual reports over the
Internet, you will receive an e-mail notification next year with instructions
containing the Internet address of those materials. Your choice to view future
proxy statements and annual reports will remain in effect until you contact your
broker or the Company and rescind your instructions. You do not have to elect
Internet access each year.
If you elected to receive this Proxy Statement electronically over the
Internet and would now like to receive a paper copy of this Proxy Statement so
that you may submit a paper proxy in lieu of an electronic proxy, you may
contact your broker or the Company.
4
PROPOSAL 1
ELECTION OF DIRECTORS
The Board is divided into three classes as nearly equal in number as
possible. The members of each class of directors serve staggered three-year
terms. Currently, the Board is composed of the following nine members:
Class Directors Term Expiration
- ------- --------- ---------------
I Bruce D. Day, Martin A. Kaplan and 2004 annual meeting of stockholders
Kevin J. Kennedy
II Robert E. Enos, Peter A. Guglielmi and 2003 annual meeting of stockholders
Donald R. Scifres, Ph.D
III Richard T. Liebhaber, Casimir S. Skrzypczak and 2002 annual meeting of stockholders
Jozef Straus, Ph.D.
At the Annual Meeting, the Stockholders will elect three Class III
directors (Richard T. Liebhaber, Casimir S. Skrzypczak and Jozef Straus, Ph.D.)
nominated by the Board of Directors, each to serve a three-year term until the
2005 annual meeting of stockholders and until a qualified successor is elected
and qualified or until the director's earlier resignation or removal. Each of
the nominees has consented, if elected as a Class III director of the Company,
to serve until his term expires. The Board of Directors has no reason to believe
that any of the nominees will not serve if elected, but if any of them should
become unavailable to serve as a director, and if the Board designates a
substitute nominee, the persons named as proxies will vote for the substitute
nominee designated by the Board.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF
EACH OF THE NOMINEES NAMED ABOVE
The following table sets forth certain information with respect
to the Company's directors as of June 30, 2002:
Name Age Position(s)
---- --- -----------
Martin A. Kaplan ............... 64 Chairman of the Board
Bruce D. Day ................... 46 Director
Robert E. Enos ................. 63 Director
Peter A. Guglielmi ............. 59 Director
Kevin J. Kennedy ............... 46 Director
Richard T. Liebhaber ........... 67 Director
Donald R. Scifres, Ph.D ........ 55 Co-Chairman and Chief Strategy Officer
Casimir S. Skrzypczak .......... 61 Director
Jozef Straus, Ph.D ............. 56 Co-Chairman and Chief Executive Officer
Martin A. Kaplan has been a member of our Board of Directors since May
1998. Mr. Kaplan has served as our Chairman of the Board from May 2000 to the
present. From May 1995 until his retirement in May 2000, Mr. Kaplan was
Executive Vice President of Pacific Telesis and was responsible for
coordinating integration plans following the merger of SBC Communications, Inc.
and Pacific Telesis Group. From 1993 to 1995, he was Chief Technology, Quality
and Re-Engineering Officer for Pacific Bell. Mr. Kaplan also is a director of
Conductus, Actelis Networks and Santera Systems.
Bruce D. Day became a member of our Board of Directors in July 1999 upon
the closing of our merger with JDS FITEL Inc. ("JDS FITEL") in July 1999 and
served as a member of the JDS FITEL Board of Directors since 1996. Since 1991,
Mr. Day has been Vice President, Corporate Development of Rogers Communications
Inc. and is principally involved in mergers, acquisitions, divestitures and
taxation for Rogers Communications Inc. and its subsidiaries.
Robert E. Enos became a member of our Board in July 1999 upon the closing
of our merger with JDS FITEL and was previously a member of the JDS FITEL Board
of Directors from 1996 until July 1999. Mr. Enos
5
was the Vice President, Product Line Management, Cable Group and the Vice
President, Transmission Network Division of Northern Telecom Limited from 1992
to 1994 and from 1989 to 1992, respectively. Mr. Enos retired from Northern
Telecom Limited in 1994.
Peter A. Guglielmi has been a member of our Board since May 1998. Mr.
Guglielmi retired as Executive Vice President of Tellabs, Inc. in 2000, where
he served as its Chief Financial Officer since 1988. From 1993 to 1997, he was
also President of Tellabs International, Inc. Prior to joining Tellabs, Mr.
Guglielmi was Vice President of Finance and Treasurer of Paradyne Corporation
for five years. Mr. Guglielmi serves on the board of directors of Tellabs, Inc.
Kevin J. Kennedy became a member of our Board in November 2001. Since
August 2001, Mr. Kennedy has been the Chief Operating Officer of Openwave
Systems, Inc. Prior to joining Openwave Systems Inc., Mr. Kennedy spent seven
years at Cisco Systems, Inc., most recently as Senior Vice President of the
Service Provider Line of Business and Software Technologies Division, and 17
years at Bell Laboratories. Mr. Kennedy is also a director of Quantum
Corporation.
Richard T. Liebhaber became a member of our Board in November 2001. Mr.
Liebhaber retired as Executive Vice President and Chief Technology Officer of
MCI Communications, Inc. ("MCI") in 1995. Prior to joining MCI in 1985, Mr.
Liebhaber was IBM's director of Business Policy and Development after serving
in engineering, manufacturing, product test, service and marketing positions.
Mr. Liebhaber is also a director of ECI, ILOG S.A. and Avici Systems, Inc.
Donald R. Scifres, Ph.D. became our Chief Strategy Officer in June 2002.
Dr. Scifres joined the Company as Co-Chairman of the Board and President of the
Amplification and Transmission Business Group in February 2001 upon the closing
of our merger with SDL, Inc. ("SDL"). Dr. Scifres helped found SDL in 1983 and
served as Chief Executive Officer, President and a member of the Board of
Directors. In 1992, Dr. Scifres became Chairman of the Board of SDL. From 1972
to 1983 Dr. Scifres held positions at the Xerox Palo Alto Research Center
including Manager of Optoelectronics and Xerox Research Fellow. Dr. Scifres is
a member of the National Academy of Engineering and a Fellow of the Institute
of Electrical and Electronic Engineers and the Optical Society of America,
holds over 100 U.S. patents and has won a number of industry awards, including
awards for commercialization of semiconductor optoelectronics and laser
technology. Dr. Scifres has also served as the President of the Laser and
Electro-Optics Manufacturers' Association and the IEEE Lasers and
Electro-Optics Society.
Casimir S. Skrzypczak has been a member of our Board of Directors since
July 1997. Since July 2001, Mr. Skrzypczak has been a general partner in Global
Asset Capital Investment. From October 1999 to July 2001, Mr. Skrzypczak was
Senior Vice President at Cisco Systems, Inc. Mr. Skrzypczak served as Corporate
Vice President and Group President of Professional Services at Telcordia
Technologies, Inc. from July 1997 to October 1999. Earlier, Mr. Skrzypczak was
President, NYNEX Science & Technology and Vice President, Network & Technology
Planning for NYNEX. Mr. Skrzypczak has served as a trustee of Polytechnic
University since 1987 and is chairman of its Education Committee. Mr.
Skrzypczak also serves as a director of Stanford Microdevices Inc. and Webex
Communications, Inc.
Jozef Straus, Ph.D. has served as our Chief Executive Officer since May
2000 and Co-Chairman of the Board since July 1999. Dr. Straus was also our
President from June 2001 until July 2002, and Chief Operating Officer following
our merger with JDS FITEL. Dr. Straus co-founded JDS FITEL in 1981 and served as
its Chief Executive Officer and President from September 1993 until July 1999.
He served on the JDS FITEL Board of Directors from 1981 and held various
positions with JDS FITEL, including Vice President, Sales and Marketing from
1990 to 1993 when he assumed the position of Chief Executive Officer and
President. Prior to 1981, Dr. Straus held various research and management
positions related to fiber optic technology at Bell-Northern Research Ltd. and
Northern Telecom Limited.
Board Committees and Meetings
During fiscal 2002, the Board held 13 meetings. The Board has four
committees: Audit Committee, Compensation Committee, Governance Committee, and
Corporate Development Committee. Each of the
6
committees is comprised solely of non-employee directors. The current members
of the committees are identified in the following table:
Corporate
Director Audit Compensation Development Governance
- -------- ----- ------------ ----------- ---------
Bruce D. Day ................ Chair X
Robert E. Enos .............. X Chair
Peter A. Guglielmi .......... X X
Martin A. Kaplan ............ X X
Kevin J. Kennedy ............ X Chair
Richard T. Liebhaber ........ X X X
Casimir S. Skrzypczak ....... X Chair X
No director attended fewer than 75% of all Board meetings and committees on
which he served after becoming a member of the Board of Directors, except for
Kevin J. Kennedy who attended three out of seven Board meetings and one out of
three Compensation Committee meetings.
The Audit Committee met eight times in fiscal 2002. The Audit Committee
engages the Company's independent auditors (who report directly to the Audit
Committee) and approves all audit and non-audit services provided by the
Company's independent auditors. The Audit Committee also oversees the
independent auditors' annual audit. The Audit Committee is responsible for
reviewing the general policies and procedures of the Company with respect to
accounting and financial controls and any change in accounting principles,
significant audit adjustments proposed by the auditors and any recommendations
that the auditors may have with respect to policies and procedures. In addition,
the Audit Committee considers whether the Company's independent auditors'
provision of non-audit services to the Company is compatible with maintaining
the accounting firm's independence from the Company. The Board has determined
that all members of the Audit Committee are "independent" as defined in Rule
4200 of the listing standards of the National Association of Securities Dealers.
The Board of Directors adopted and approved a charter for the Audit
Committee in 2000, a copy of which was attached as Appendix A to the Company's
2000 proxy statement.
The Compensation Committee met six times in fiscal 2002. The Compensation
Committee's functions are to establish and apply the Company's compensation
policies with respect to its executive officers and administer the Company's
various stock option and employee stock purchase plans.
The Corporate Development Committee met twice in fiscal 2002. The Corporate
Development Committee oversees the Company's strategic acquisition and
investment activities. The Committee reviews and approves strategic transactions
for which approval of the full Board of Directors is not required and makes
recommendations to the Board of Directors regarding those transactions for which
the consideration of the full Board of Directors is appropriate.
The Corporate Governance Committee met four times in fiscal 2002. The
Corporate Governance Committee reviews current trends and practices in corporate
governance and recommends to the Board of Directors the adoption of programs
pertinent to the Company. The Corporate Governance Committee also reviews
proposals by stockholders in connection with the annual meetings of
stockholders, makes recommendations to the Board of Directors for action on such
proposals and makes recommendation of qualified candidates for election as
executive officers and directors of the Company. Stockholders wishing to
recommend candidates for consideration by the Corporate Governance Committee may
do so by writing to the Company's Corporate Secretary and providing the
candidate's name, biographical data and qualifications.
Director Compensation
Directors who are employees of the Company do not receive any compensation
for their services as directors. Directors who are not employees of the Company
receive a $1,500 fee for attendance at each Board meeting and a $500 fee for
attendance at committee meetings held on a separate day. Martin A. Kaplan
receives
7
$80,000 annually as compensation for his services as Chairman of the Board. All
directors are reimbursed for expenses incurred in connection with attending
Board and committee meetings.
The Company's Amended and Restated 1993 Flexible Stock Incentive Plan (the
"1993 Plan") also provides for automatic grants of nonqualified stock options to
non-employee directors. Under the 1993 Plan, each non-employee director who
first joins the Board after the effective date of the 1993 Plan automatically
will receive options to purchase 40,000 shares of the Company's Common Stock.
Immediately after each annual meeting of stockholders, each individual who is
continuing to serve as a non-employee director automatically will be granted
options to purchase 10,000 additional shares of the Company's Common Stock,
whether or not such non-employee director stands for re-election at such annual
meeting of stockholders, provided that each such individual has served as a
non-employee director for at least nine months. In its discretion, the Board may
make grants of additional options to such non-employee directors. Such options
granted to non-employee directors have an exercise price equal to 100% of the
fair market value of the Common Stock on the date of grant and vest monthly on a
straight-line basis over a three-year period for the initial 40,000 shares
received on joining the Board of Directors and over twelve months for the
subsequent grants of 10,000 shares, and terminate eight years from the date of
grant. In addition, all non-employee directors who are serving as chairperson of
one of the committees of the Board receive an annual option grant of 3,000
shares of the Company's Common Stock upon their initial appointment as
chairperson and an automatic option grant of 3,000 shares of the Company's
Common Stock after each annual meeting of stockholders if the non-employee
director continues as chairperson for the ensuing year. Such options granted to
non-employee directors serving as chairpersons have an exercise price equal to
100% of the fair market value of the Common Stock on the date of grant and vest
over twelve months, with vesting to cease if the non-employee director no longer
continues to serve as chairperson.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or executive
officers of the Company.
Certain Relationships and Related Transactions
In fiscal 2002, pursuant to the 1993 Plan, Bruce D. Day, Robert E. Enos,
Peter A. Guglielmi, and Casimir S. Skrzypczak were each automatically granted
options to purchase 10,000 shares of the Company's Common Stock at a price of
$8.81 per share and 3,000 shares of the Company's Common Stock at $8.77 per
share. In addition, the Board issued discretionary grants to purchase 10,000
shares at $8.81 per share to each of Mr. Day, Mr. Enos, Mr. Guglielmi and Mr.
Skrzypczak. Pursuant to the 1993 Plan, Kevin J. Kennedy and Richard T.
Liebhaber were each automatically granted options to purchase 40,000 shares of
the Company's Common Stock at a price of $8.81 per share. Finally, pursuant to
the 1993 Plan, Martin A. Kaplan was automatically granted options to purchase
10,000 shares of the Company's Common Stock at $8.81 per share, and the
following discretionary stock option grants: (i) 25,000 shares at $9.25, (ii)
10,000 shares at $8.81, and (iii) 60,000 shares at $4.29.
The Company has entered into certain employment agreements with its Named
Executive Officers (as defined below), Jozef Straus, Ph.D., Donald R. Scifres,
Ph.D., Anthony R. Muller, Michael C. Phillips, and Gregory P, Dougherty (see
"Employment Contracts, Termination of Employment and Change in Control
Arrangements" below).
Pursuant to the terms of a separation agreement entered into between the
Company and Gregory P. Dougherty, the Company forgave Mr. Dougherty's housing
assistance loan, which had an outstanding balance of $239,790 (see "Employment
Contracts, Termination of Employment and Change in Control Arrangements" below).
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any member of the Company's
Board or Compensation Committee and any member of the board of directors or
compensation committee of any other companies, nor has such interlocking
relationship existed in the past.
8
PROPOSAL 2
RATIFICATION OF INDEPENDENT AUDITORS
Ernst & Young LLP has served as the Company's independent auditors since
1987 and has been appointed by the Board to continue as the Company's
independent auditors for the fiscal year ending June 30, 2003. A representative
of Ernst & Young LLP is expected to be present at the Annual Meeting and will
have the opportunity to make a statement if he or she desires to do so, and will
be available to respond to appropriate questions.
In the event the Stockholders fail to ratify the appointment, the Board
will reconsider its selection. Even if the selection is ratified, the Board in
its discretion may direct the appointment of a different independent accounting
firm at any time during the fiscal year if the Board believes that such a change
would be in the best interests of the Company and its stockholders.
The Company has been informed by Ernst & Young LLP that neither the firm
nor any of its members has any direct financial interest or material indirect
financial interest in the Company. Total fees billed by Ernst & Young LLP for
audit and other professional services were $6.8 million for the year ended June
30, 2002. The components of the total fees were as follows:
Audit Fees:
The aggregate fees billed by Ernst & Young LLP for professional services
rendered for: (i) the audit of the Company's annual financial statements
included in the Annual Report on Form 10-K, and (ii) the reviews of the
Company's interim financial statements included in the Quarterly Reports on Form
10-Q were $2.7 million.
Financial Information Systems Design and Implementation Fees:
No fees were billed by Ernst & Young LLP for professional services related
to financial information systems design and implementation as described in
Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X.
All Other Fees:
The aggregate fees billed by Ernst & Young LLP for other professional
services, other than the audit fees and financial information systems design and
implementation fees described above, were $4.1 million, of which $0.8 million
was related to audit-related services and $3.3 million was related to non-audit
services. Audit-related services generally include statutory audits of foreign
subsidiaries, business combinations, accounting consultations and Securities and
Exchange Commission ("SEC") registration statements. Non-audit services
generally include tax compliance and tax consultations.
The Audit Committee has determined that the other professional services
provided by Ernst & Young LLP are compatible with maintaining the independence
of Ernst & Young LLP.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE COMPANY'S INDEPENDENT AUDITORS
FOR THE YEAR ENDING JUNE 30, 2003
9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership as of August 16, 2002, by (i) all
persons who are beneficial owners of five percent (5%) or more of the Company's
Common Stock including Exchangeable Shares, (ii) each director and nominee,
(iii) the Named Executive Officers (as defined in the "Executive Compensation"
section below), and (iv) all current directors and executive officers as a
group.
As of August 16, 2002, 1,414,097,002 shares of the Company's Common Stock
were outstanding, including 153,536,601 Exchangeable Shares. The amounts and
percentages of Common Stock beneficially owned are reported on the basis of
regulations of the SEC governing the determination of beneficial ownership of
securities. Under the SEC rules, a person is deemed to be a "beneficial owner"
of a security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment power,"
which includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which that person has a right to acquire beneficial ownership within 60 days.
Under these rules, more than one person may be deemed a beneficial owner of
securities as to which such person has no economic interest.
Number of Shares
Beneficially Owned
---------------------------
Name Number Percentage
- ---- ------------- -----------
5% Stockholders:
FEJ Holding Inc. and FEJ Sales, Inc.(1) .................................. 107,551,080 7.6%
c/o The Furukawa Electric Co. Ltd
6-1 Marunouchi 2-chome
Chiyoda-ku, Tokyo 100-8322
Japan
Directors and Named Executive Officers
Jozef Straus, Ph.D.(2) ................................................... 7,901,042 *
Donald R. Scifres, Ph.D.(3) .............................................. 9,764,479 *
Anthony R. Muller(4) ..................................................... 3,064,028 *
Gregory P. Dougherty(5) .................................................. 2,186,789 *
Michael C. Phillips(6) ................................................... 1,677,135 *
Bruce D. Day(7) .......................................................... 613,298 *
Robert E. Enos(8) ........................................................ 553,570 *
Martin A. Kaplan(9) ...................................................... 390,126 *
Casimir S. Skrzypczak(10) ................................................ 316,465 *
Peter A. Guglielmi(11) ................................................... 274,666 *
Kevin J. Kennedy(12) ..................................................... 11,111 *
Richard T. Liebhaber(13) ................................................. 11,111 *
All directors and executive officers as a group (18 persons)(14) ......... 29,665,773 2.1%
- -------------
* Less than 1%.
(1) Includes 107,430,080 shares issuable upon exchange of the Exchangeable
Shares of JDS Uniphase Canada Ltd. Based upon a Schedule 13G/A filed with
the SEC on February 14, 2002.
(2) Includes 7,897,952 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(3) Includes (i) 2,244,860 shares subject to stock options currently exercisable
or exercisable within 60 days of August 16, 2002, (ii) 230,000 shares held
by the Scifres Family 2001 Charitable Remainder Annuity Trust, (iii) 113,617
shares held by the Scifres 2000 Charitable Unitrust dated 12/14/00, (iv)
161,455 shares held by the Scifres Family 1999 Charitable Trust, and (v)
6,115,276 shares held by the Scifres Revocable Living Trust.
10
(4) Includes 2,333,331 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(5) Includes 2,176,650 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(6) Includes 1,669,062 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(7) Includes 601,098 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002, and 12,200 shares issuable
upon exchange of the Exchangeable Shares of JDS Uniphase Canada Ltd.
(8) Includes 541,570 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002, and 12,000 shares issuable
upon exchange of the Exchangeable Shares of JDS Uniphase Canada Ltd.
(9) Includes (i) 386,666 shares subject to stock options currently exercisable
or exercisable within 60 days of August 16, 2002, (ii) 1,600 shares held by
Mr. Kaplan's children, and (iii) 260 shares held by Mr. Kaplan's spouse.
(10) Includes 309,666 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(11) Includes 258,666 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(12) Includes 11,111 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(13) Includes 11,111 shares subject to stock options currently exercisable or
exercisable within 60 days of August 16, 2002.
(14) Includes 21,299,597 shares subject to stock options currently exercisable
or exercisable within 60 days of August 16, 2002, and 24,200 shares
issuable upon exchange of the Exchangeable Shares of JDS Uniphase Canada
Ltd.
11
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning compensation
paid during each of the last three fiscal years to the Company's Chief Executive
Officer and the four other most highly compensated executive officers serving at
the end of fiscal 2002 (collectively the "Named Executive Officers"):
Long-Term
Annual Compensation Compensation All
---------------------------------------------------- Securities Other
Fiscal Bonus and Underlying Compensation
Name and Principal Position Year(1) Salary($)(2) Commission($)(3) Options(#) ($)(4)
- ------------------------------------- --------- ------------------- ---------------------- -------------- -----------------
Jozef Straus, Ph.D. ................. 2002 $505,763(US) -- 1,400,000 $4,591(US)
Co-Chairman and Chief 743,471(CDN) -- 6,750(CDN)
Executive Officer 2001 521,355(US) -- 300,000 --
782,033(CDN) --
2000 326,076(US) 278,208(US) 9,613,328 4,591(US)
480,000(CDN) 409,536(CDN) 6,750(CDN)
Donald R. Scifres, Ph.D.(5) ......... 2002 299,999 -- 750,000 1,998
Co-Chairman and Chief 2001 103,649 75,000,000(6) 200,000 2,265
Strategy Officer
Anthony R. Muller ................... 2002 296,538 -- 750,000 3,147
Executive Vice President, 2001 306,731 -- 150,000 2,908
Chief Financial Officer and 2000 248,462 139,500 1,200,000 2,325
Secretary
Michael C. Phillips ................. 2002 260,000 -- 235,000 --
Senior Vice President, 2001 258,654 -- 225,000 --
Business Development and 2000 257,371 123,538 800,000 --
General Counsel
Gregory P. Dougherty(7) ............. 2002 344,238 -- 900,000 6,362
Executive Vice President 2001 103,603 121,271,346(8) 135,000 2,255
and Chief Operating Officer
- -------------
(1) Compensation reported for fiscal years ending June 30, 2002, 2001 and 2000.
(2) The compensation information for Dr. Straus has been converted from
Canadian dollars to U.S. dollars based upon an average foreign exchange rate
which was CDN $1.47 = U.S. $1.00. This currency conversion causes Dr.
Straus' reported salary to fluctuate from year-to-year because of the
conversion of Canadian dollars to U.S. dollars.
(3) Bonus and commission include amounts in the year earned, rather than in the
year in which such bonus amount was paid or is to be paid.
(4) Represents contributions made by the Company to (i) Dr. Scifres, Mr. Muller
and Mr. Dougherty under its 401(k) plan and (ii) to Dr. Straus under the
Company's group retirement savings plan for Canadian employees.
(5) Dr. Scifres joined the Company on February 13, 2001 upon the Company's
acquisition of SDL. (6) Represents amounts payable pursuant to the terms of
the Company's acquisition of SDL (see description under "Employment
Contracts, Termination of Employment and Change in Control Arrangements").
(7) Mr. Dougherty joined the Company on February 13, 2001 upon the Company's
acquisition of SDL and resigned from the Company in August 2002 due to the
illness of a family member.
(8) Represents amounts payable pursuant to the terms of the Company's
acquisition of SDL, including payment of $46,271,346 as reimbursement for
federal excise tax imposed upon Mr. Dougherty by Section 4999 of the
Internal Revenue Code of 1986, as amended (see description under "Employment
Contracts, Termination of Employment and Change in Control Arrangements").
12
Employment Contracts, Termination of Employment and Change in Control
Arrangements
The Company and Dr. Jozef Straus are parties to a retention agreement dated
July 6, 1999 (the "Straus Agreement"). The term of the Straus Agreement expires
on July 6, 2004, unless sooner terminated pursuant to the terms of the Straus
Agreement. Dr. Straus' current annual base salary under the Straus Agreement is
approximately $500,000 ($U.S.), subject to adjustment from time to time by the
Company. In addition, Dr. Straus is eligible to earn an annual bonus in an
amount up to 100% of his annual base salary, based upon achievement of
objectives determined by the Company from time to time. However, no bonus was
paid for fiscal 2002. The Straus Agreement also provides for payment of
severance in the amount of three years salary and bonus based upon previous
bonuses paid to Dr. Straus and acceleration of vesting of Dr. Straus' options in
the event the Straus Agreement is terminated (i) by the Company without cause
(as that term is defined in the Straus Agreement); (ii) as a result of the death
or disability of Dr. Straus; or (iii) by Dr. Straus for certain reasons. The
Company and Dr. Straus have also entered into an agreement regarding change of
control dated July 6, 1999 providing for the acceleration of vesting of Dr.
Straus' options in the event of a change of control of the Company.
The Company and Dr. Donald R. Scifres are parties to a transition agreement
(the "Scifres Agreement") which modified Dr. Scifres' employment agreement and
change of control agreement with SDL and which became effective upon the closing
of the merger of the Company with SDL on February 13, 2001. The Scifres
Agreement provides that Dr. Scifres receive an initial cash payment of $75
million, plus such additional payment as required to make Dr. Scifres whole in
the event that the payment results in Dr. Scifres being subject to excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Company did not make such an additional payment. This initial cash
payment represents a combination of a signing bonus and consideration for Dr.
Scifres' agreement to (a) amend his change of control agreement and (b) enter
into non-compete and non-solicitation covenants with the Company. Dr. Scifres'
current annual base salary under the Scifres Agreement is approximately
$300,000, to be reviewed annually. In addition, Dr. Scifres is to receive an
annual cash bonus in an amount equal to 0% to 200% of his target bonus. Dr.
Scifres' target bonus is 60% of his base salary. However, no bonus was paid for
fiscal 2002. The Scifres Agreement provides that if Dr. Scifres' employment with
the Company is terminated without cause or for good reason (each as defined in
the change of control agreement as amended by the Scifres Agreement), or for
death, disability or retirement after age 55, all unvested options granted prior
to the merger with SDL shall become fully vested. The Scifres Agreement further
provides for a payment of severance if, within four years after a change of
control, Dr. Scifres is terminated without cause or for good reason (each as
defined in the change of control agreement as amended by the Scifres Agreement).
In such event, Dr. Scifres is entitled to receive (i) payment of all accrued
compensation, (ii) severance pay equal to twice the sum of (a) Dr. Scifres'
annual base salary in effect on termination; and (b) the greater of his annual
bonus payable during the two fiscal years prior to termination or 12 times 5% of
his current base salary, (iii) payment of an amount equal to Dr. Scifres' annual
base salary and twelve monthly payments of 4.1666% of his base salary in effect
on termination, (iv) 24 months medical, disability and life insurance coverage,
and (v) immediate acceleration of vesting of all outstanding options.
The Company and Anthony R. Muller are parties to an employment agreement
dated September 29, 1999 (the "Muller Agreement"). The term of the Muller
Agreement expires on July 6, 2004, unless sooner terminated pursuant to the
terms of the Muller Agreement. Mr. Muller's current annual base salary under the
Muller Agreement is approximately $300,000, subject to adjustment from time to
time by the Company. In addition, Mr. Muller is eligible to earn an annual bonus
in an amount up to 60% of his annual base salary, based upon achievement of
objectives determined by the Company from time to time. However, no bonus was
paid for fiscal 2002. The Muller Agreement also provides for payment of
severance in the amount of three years salary and bonus based upon previous
bonuses paid to Mr. Muller and partial acceleration of vesting of Mr. Muller's
options in the event the Muller Agreement is terminated (i) by the Company
without cause (as that term is defined in the Muller Agreement); (ii) as a
result of the death or disability of Mr. Muller; or (iii) by Mr. Muller for
certain reasons. The Company and Mr. Muller have also entered into an agreement
regarding change of
13
control dated March 4, 1998 providing for the acceleration of vesting of Mr.
Muller's options in the event of a change of control of the Company.
The Company and Michael C. Phillips are parties to an employment agreement
dated September 29, 1999 (the "Phillips Agreement"). The term of the Phillips
Agreement expires on July 6, 2004, unless sooner terminated pursuant to the
terms of the Phillips Agreement. Mr. Phillips' current base salary under the
Phillips Agreement is approximately $260,000, subject to adjustment from time to
time by the Company. In addition, Mr. Phillips is eligible to earn an annual
bonus in an amount up to 45% of his annual base salary, based upon achievement
of objectives determined by the Company from time to time. However, no bonus was
paid for fiscal 2002. The Phillips Agreement also provides for payment of
severance in the amount of two years salary plus a bonus based upon previous
bonuses paid to Mr. Phillips and partial acceleration of vesting of Mr.
Phillips' options in the event the Phillips Agreement is terminated (i) by the
Company without cause (as that term is defined in the Phillips Agreement); (ii)
as a result of the death or disability of Mr. Phillips; or (iii) by Mr. Phillips
for certain reasons. The Company and Mr. Phillips have also entered into an
agreement regarding change of control dated August 3, 1998 providing for the
acceleration of vesting of Mr. Phillips' options in the event of a change of
control of the Company.
The Company and Gregory P. Dougherty were parties to a transition agreement
(the "Dougherty Agreement") which modified Mr. Dougherty's employment agreement
and change of control agreement with SDL and became effective upon the closing
of the merger of the Company with SDL on February 13, 2001. The Dougherty
Agreement provided that Mr. Dougherty receive an initial cash payment of $75
million, plus such additional payment as required to make Mr. Dougherty whole in
the event that the payment resulted in Mr. Dougherty being subject to excise tax
imposed by Section 4999 of the Code and pursuant to which the Company has paid
Mr. Dougherty an additional $46,271,346 as reimbursement for federal excise tax
imposed upon him as a result of Section 4999 of the Code. The payment
represented a combination of a signing bonus and consideration for Mr.
Dougherty's agreement to (a) amend his change of control agreement and (b) enter
into non-compete and non-solicitation covenants with the Company. The Company
and Mr. Dougherty entered into an agreement on November 1, 2001 which amended
the Dougherty Agreement (the "Dougherty Amendment"). Mr. Dougherty's annual base
salary under the Dougherty Agreement was approximately $350,000, to be reviewed
annually. In addition, Mr. Dougherty was to receive an annual cash bonus in an
amount equal to 0% to 200% of his target bonus. Mr. Dougherty's target bonus was
80% of his base salary. However, no bonus was paid for fiscal 2002 or
thereafter. The Dougherty Amendment further provided for a payment of severance
if, within 4 years after a change of control, Mr. Dougherty was terminated
without cause or resigned for good reason (each as had been previously defined
in the change of control agreement as amended by the Dougherty Agreement, which
definition included resignation for family medical reasons). In such event, Mr.
Dougherty was entitled to receive (i) payment of all accrued compensation, (ii)
severance pay equal to two times the sum of Mr. Dougherty's annual base salary
in effect on termination together with an additional amount equal to Mr.
Dougherty's target bonus, (iii) 24 months medical, disability and life insurance
coverage, (iv) immediate acceleration of vesting of all outstanding options, and
(v) if termination occurred prior to Mr. Dougherty's fifth anniversary of
employment, a forgiveness of the housing assistance loan extended by SDL, prior
to its merger with the Company, to relocate Mr. Dougherty to California. The
housing assistance loan had a maximum balance during the fiscal year of $349,950
and accrued interest at the rate of 5% per year. Due to family medical reasons,
on July 24, 2002, the Company and Mr. Dougherty amended the Dougherty Amendment.
Pursuant to such amendment which reduced the Company's original severance pay
obligation under the Dougherty Amendment by 50%, the Company (i) terminated Mr.
Dougherty's employment with the Company effective August 31, 2002, (ii) forgave
Mr. Dougherty's housing assistance loan which had an outstanding balance of
principal and interest in the amount of $239,790, (iii) paid Mr. Dougherty
severance pay in the amount of $560,000 equal to one year of his base salary and
target bonus, (iv) agreed to provide 18 months medical coverage, (v) fully
accelerated Mr. Dougherty's stock options previously granted by SDL and the
Company on February 21, 2001 which shall be exercisable until the end of the
term of each grant, and (vi) partially accelerated those stock options granted
to Mr. Dougherty after February 2001, which shall be exercisable for 90 days
from Mr. Dougherty's termination date.
14
Option Grants in Last Fiscal Year
The following table set forth information regarding stock options granted
to the Named Executive Officers for the fiscal year ended June 30, 2002:
Individual Grants
------------------------------------------------------ Potential Realizable
% of Total Value at Assumed Annual
Number of Options Rate of Stock Price
Securities Granted to Appreciation for Option
Underlying Employees Exercise Term(4)(5)
Options in Fiscal Price per Expiration --------------------------------
Name Granted(1) 2002(2) Share(3) Date 5% 10%
- ---------------------------------- ------------ ----------- ----------- ------------ ------------- -------------
Jozef Straus, Ph.D. .............. 400,000 0.9% $9.24 07/30/2009 $1,764,675 $4,226,704
1,000,000 2.2 3.87 05/06/2010 1,847,753 4,425,689
Donald R. Scifres, Ph.D. ......... 300,000 0.7 9.24 07/30/2009 1,323,506 3,170,028
450,000 1.0 3.87 05/06/2010 831,489 1,991,560
Anthony R. Muller ................ 300,000 0.7 9.24 07/30/2009 1,323,506 3,170,028
450,000 1.0 3.87 05/06/2010 831,489 1,991,560
Michael C. Phillips .............. 115,000 0.2 8.81 11/07/2009 483,734 1,158,627
120,000 0.3 3.87 05/06/2010 221,730 531,083
Gregory P. Dougherty ............. 300,000 0.7 9.24 07/30/2009 1,323,506 3,170,028
600,000 1.3 3.87 05/06/2010 1,108,652 2,655,413
- -------------
(1) Except in the event of a change in control of the Company, options granted
become exercisable at the rate of 25% of the shares subject thereto one year
from the grant date and as to approximately 6.25% of the shares subject to
the option at the end of each three-month period thereafter such that the
option is fully exercisable four years from the grant date.
(2) Based on a total of 46.0 million options granted to the Company's employees
in fiscal 2002, including the Named Executive Officers.
(3) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the date the options were
granted.
(4) The potential realizable is calculated based upon the term of the option at
its time of grant. It is calculated assuming that the stock price on the
date of grant appreciates at the indicated annual rate, compounded annually
for the entire term of the option, and that the option is exercised and sold
on the last day of its term for the appreciated stock price.
(5) Stock price appreciation of 5% and 10% is assumed pursuant to the rules
promulgated by the SEC and does not represent the Company's prediction of
the future stock price performance.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during fiscal 2002, including
the shares acquired on exercise and the aggregate value of gains on the date of
exercise. In addition, the table sets forth the number of underlying stock
options as of June 30, 2002 and value of "in-the-money" stock options, which
represents the difference between the exercise price of a stock option and the
market price of the shares subject to such option:
15
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares June 30, 2002 June 30, 2002(2)
Acquired on Value ----------------------------- -----------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ------------- ------------- ------------- --------------- ------------- --------------
Jozef Straus, Ph.D. .......... -- $ -- 6,478,370 4,969,582 $ -- $ --
Donald R. Scifres, Ph.D. ..... 462,551 2,635,721 2,169,860 1,895,000 2,331,394 --
Anthony R. Muller ............ 4,245 21,543 2,073,956 1,234,375 -- --
Michael C. Phillips .......... -- -- 1,455,000 735,000 -- --
Gregory P. Dougherty ......... -- -- 910,150 1,732,250 499,222 117,920
- -------------
(1) The value realized upon the exercise of stock options represents the
positive spread between the exercise price of stock options and the fair
market value of the shares subject to such options on the exercise date.
(2) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value of the
shares subject to such options on June 30, 2002, which was $2.67 per share.
EQUITY COMPENSATION PLANS
The following table sets forth information about shares of the Company's
Common Stock and Exchangeable Shares that may be issued under the Company's
equity compensation plans, including compensation plans that were approved by
the Company's stockholders as well as compensation plans that were not approved
by the Company's stockholders. Information in the table is as of June 30, 2002.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price equity compensation
of outstanding of outstanding options, plans (excluding
options, warrants warrants securities reflected
and rights and rights in column (a))
Plan Category (a) (b) (c)
- --------------------------- ------------------------- ------------------------- ------------------------
Equity compensation plans
approved by security
holders 19,466(1) $ 0.23 45,897,842(2)
Equity compensation plans
not approved by security
holders 109,170,067(3)(4) $23.65 59,179,396(5)
----------- -----------
Total/Weighted Ave./Total 109,189,533 $23.65 105,077,238
----------- -----------
- -------------
(1) Represents shares of the Company's Common Stock issuable upon exercise of
options outstanding under the following equity compensation plan: 1984
Stock Option Plan.
(2) Represents shares of the Company's Common Stock authorized for future
issuance under the following equity compensation plan: Amended and
Restated 1998 Employee Stock Purchase Plan.
(3) Represents shares of the Company's Common Stock issuable upon exercise of
options outstanding under the following equity compensation plans: Amended
and Restated 1993 Flexible Stock Incentive Plan and 1996 Non-qualified Stock
Option Plan.
(4) As of June 30, 2002, options and rights to purchase an aggregate of
43,385,456 shares of the Company's Common Stock at a weighted average
exercise price of $32.33 were outstanding under the following equity
compensation plans, which options and rights were assumed in connection
with merger and acquisition transactions: Uniphase Telecommunications,
Inc. 1995 Flexible Stock Incentive Plan; JDS FITEL, Inc. 1994 and 1996
Stock Option Plans; Broadband Communications Products, Inc. 1992 Key
Employee Incentive
16
Stock Option Plan, 1997 Employee Stock Option Plan, and 1997 Nonqualified
Stock Option Plan; EPITAXX, Inc. Amended and Restated 1996 Employee,
Director and Consultant Stock Option Plan; Optical Coating Laboratory, Inc.
1993, 1995, 1996, 1998 and 1999 Incentive Compensation Plans, 1999 Director
Stock Plan and 1999 Employee Stock Purchase Plan; Cronos Integrated
Microsystems, Inc. 1999 Stock Plan; E-TEK Dynamics, Inc. 1997 Executive
Equity Incentive Plan, 1997 Equity Incentive Plan, 1998 Director Option Plan
and 1998 Stock Plan; Optical Process Automation, Inc. 2000 Stock Option and
Incentive Plan, 2000 Series B Preferred Stock Option Plan; SDL, Inc. 1985
Stock Option Plan and 1985 Employee Stock Purchase Plan; and Epion
Corporation 1996 Stock Option Plan. No further grants or awards will be made
under the assumed equity compensation plans, and the options outstanding
under these equity compensation plans are not reflected in the table above.
(5) Represents shares of the Company's Common Stock issuable upon exercise of
options or authorized for future issuance under the following equity
compensation plans: Amended and Restated 1993 Flexible Stock Incentive Plan,
1996 Non-qualified Stock Option Plan, and Amended and Restated 1999 Canadian
Employee Stock Purchase Plan.
The following are descriptions of the material features of the Company's
equity compensation plans that were not approved by the Company's stockholders:
Amended and Restated 1993 Flexible Stock Incentive Plan
The 1993 Flexible Stock Incentive Plan (the "1993 Plan") was adopted by the
Board of Directors in August 1993 and was approved by the Company's stockholders
in October 1993. Amendment and restatements of the 1993 Plan were adopted by the
Board of Directors and approved by the Company's stockholders in both 1995 and
1996. The 1993 Plan has subsequently been amended and restated by the Board of
Directors without approval of the Company's stockholders.
The 1993 Plan is administered by the Compensation Committee. Pursuant to
the 1993 Plan, the Compensation Committee may grant non-qualified stock options,
in its discretion, to employees, officers, directors, independent contractors
and consultants of the Company or any parent or subsidiary corporation of the
Company. The 1993 Plan also permits the grant of incentive stock options to
employees of the Company or any parent or subsidiary corporation of the Company.
However, it is the Company's present intention to issue only non-qualified-stock
options in the future under the 1993 Plan.
An aggregate of 205,114,891 shares has been reserved for the grant of stock
options under the 1993 Plan, subject to increase as provided below. Shares
underlying options that are forfeited or canceled are not counted as having been
issued under the 1993 Plan. The number of shares available for the grant of
stock options under the 1993 Plan is automatically increased on the first day of
each fiscal year of the Company by an amount, rounded to the nearest whole
share, equal to four percent (4%) of the aggregate number of shares of Common
Stock and Exchangeable Shares, outstanding as of such date or such lesser number
of shares as determined by the Compensation Committee; provided that such
increase in the number of shares under the 1993 Plan is reduced by the Excess
Carryover. "Excess Carryover" means, as of the effective date of each annual
increase, the number of shares subject to the 1993 Plan that are not then-issued
and are not subject to then-outstanding option grants, minus the number of
shares equal to one percent (1%) of the aggregate number of shares of Common
Stock and Exchangeable Shares outstanding as of such effective date.
The number of shares available for the grant of stock options under the
1993 Plan is also increased upon the closing of a Company Acquisition by an
amount, rounded to the nearest whole share, equal to the product obtained by
multiplying four percent (4%) times the Acquisition Consideration. "Company
Acquisition" means (x) if the consideration paid by the Company or its
subsidiary consists, in whole or in part, of Common Stock, Exchangeable Shares
or a combination thereof ("Stock Consideration"), the number of shares of Common
Stock and/or Exchangeable Shares, (y) if the consideration paid by the Company
or its subsidiary consists, in whole or in part, of cash, promissory notes or
cash equivalents, or any combination thereof ("Cash Consideration"), the number
of shares of Common Stock (rounded to the nearest whole share) equal to the
17
Cash Consideration divided by the Market Value, and (z) if the consideration
paid by the Company or its subsidiary consists, in whole or in part, of any
consideration (other than Stock Consideration or Cash Consideration), the number
of shares of Common Stock (rounded to the nearest whole share) equal to the fair
market value of such other consideration, as determined by the Compensation
Committee, divided by the Market Value. "Market Value" means the closing market
price of one share of Common Stock on the NASDAQ National Market (or such other
exchange upon which the Common Stock is then listed or quoted, if the Common
Stock is not then-listed on the NASDAQ National Market) on the trading day
immediately preceding the closing of the applicable Company Acquisition.
The 1993 Plan also provides for automatic grants of non-qualified stock
options to non-employee directors. Each non-employee director who first joins
the Board after the effective date of the 1993 Plan automatically receives
options to purchase 40,000 shares of the Company's Common Stock. Immediately
after each annual meeting of stockholders, each individual who is continuing to
serve as a non-employee director automatically is granted options to purchase
10,000 additional shares of the Company's Common Stock, whether or not such
non-employee director stands for re-election at such annual meeting of
stockholders, provided that each such individual has served as a non-employee
director for at least nine months. In its discretion, the Board may make grants
of additional options to such non-employee directors. Such options granted to
non-employee directors vest monthly on a straight-line basis over a three-year
period for the initial 40,000 shares received on joining the Board of Directors
and over twelve months for the subsequent grants of 10,000 shares. In addition,
all non-employee directors who are serving as chairperson of one of the
committees of the Board receive an annual option grant of 3,000 shares of the
Company's Common Stock upon their initial appointment as chairperson and an
automatic option grant of 3,000 shares of the Company's Common Stock after each
annual meeting of stockholders if the non-employee director continues as
chairperson for the ensuing year. Such options granted to non-employee directors
serving as chaipersons vest over twelve months, with vesting to cease if the
non-employee director no longer continues to serve as chairperson.
All non-qualified stock options issued under the 1993 Plan must have an
exercise price of not less than 100% of the fair market value of the Common
Stock on the date of grant of the option. Options are generally
non-transferable. The term of all options granted under the Plan may not exceed
eight (8) years from the date of grant. The 1993 Plan will terminate with
respect to the grant of incentive stock options on August 26, 2003. Otherwise,
the 1993 Plan will continue in effect until terminated by the Board of
Directors.
The Company has established subplans under the 1993 Plan for employees in
the United Kingdom and France. Each subplan is subject to and incorporates the
terms and conditions of the 1993 Plan, and provides further administrative rules
in order to take advantage of certain employee- and Company-favorable tax laws
in these jurisdictions.
1996 Non-Qualified Stock Option Plan
The Board of Directors adopted the 1996 Non-Qualified Stock Option Plan
(the "1996 Plan") in November 1996. The 1996 Plan is administered by the
Compensation Committee. Pursuant to the 1996 Plan, the Compensation Committee
may grant non-qualified stock options only to employees, independent contractors
and consultants of the Company or any parent or subsidiary corporation of the
Company. Only non-qualified stock options may be issued under the 1996 Plan.
Stock options may not be granted to officers and directors of the Company.
An aggregate of 18,632,000 shares has been reserved for the grant of stock
options under 1996 Plan. Shares underlying awards that are forfeited or canceled
are not counted as having been issued under the 1996 Plan. Stock options issued
under the 1996 Plan must have an exercise price of not less than 85% of the fair
market value of the Company's Common Stock on the date of grant of the option.
Options are generally non-transferable. The term of all options granted under
the 1996 Plan shall not exceed eight (8) years from the date of grant. The 1996
Plan will continue in effect until terminated by the Board of Directors. The
Company last granted stock options under the 1996 Plan on April 17, 1998. The
Company presently does not intend to grant any additional options under the 1996
Plan.
18
Amended and Restated 1999 Canadian Employee Stock Purchase Plan
The Amended and Restated 1999 Canadian Employee Stock Purchase Plan (the
"Canadian ESPP") was adopted by the Board of Directors in August 1999 and is
administered by the Board of Directors. An aggregate of 10,000,000 shares of
Common Stock has been reserved for issuance under the Canadian ESPP. Only
employees of JDS Uniphase Inc. (which generally includes all Company employees
in Ottawa) and corporate affiliates of the Company as designated by the Board of
Directors are eligible to participate in the Canadian ESPP, and the Canadian
ESPP is not intended to qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Code.
The terms of the Canadian ESPP provide that shares of the Company's Common
Stock are offered for purchase through a series of successive or overlapping
purchase periods (the "Purchase Periods"), each of a duration (not to exceed
twenty-four months) as determined by the Board of Directors. Participants
enrolled in a Purchase Period are granted a purchase right which entitles the
participating employee to specify a level of payroll deduction between 1% and
10% of compensation to be in effect on each pay day during the Purchase Period,
and the accumulated payroll deductions are applied to the purchase of the shares
when the purchase right is exercised. No rights or accumulated payroll
deductions of a participant under the Canadian ESPP may be transferred (other
than by will or by the laws of descent and distribution).
Outstanding purchase rights are automatically exercised on successive
quarterly or semi-annual purchase dates as determined by the Board of Directors.
The purchase right is exercised by applying the accumulated payroll deductions
to the purchase of whole shares on each quarterly or semi-annual purchase date.
The purchase price per share is the lesser of (i) 85% of the fair market value
per share on the date the Purchase Period begins or (ii) 85% of the fair market
value per share on the date the purchase right is exercised. The Canadian ESPP
limits purchase rights to a maximum of (i) $25,000 worth of stock (determined at
the fair market value of the shares at the time the purchase right is granted)
in any calendar year, and (ii) 20,000 shares in any Purchase Period.
The Board of Directors last amended the Canadian ESPP on July 31, 2002 to
provide that no new Purchase Periods shall commence under the Canadian ESPP on
or after August 1, 2002, except as otherwise determined by the Board of
Directors. Although the Canadian ESPP will not terminate by its terms until July
1, 2009, all Purchase Periods under the Canadian ESPP were terminated on July
31, 2002. The Company has since integrated former participants in the Canadian
ESPP into the Company's stockholder approved Amended and Restated 1998 Employee
Stock Purchase Plan and it is the Company's present intention to utilize for
future purchase periods only this single stockholder approved employee stock
purchase plan for the benefit of all eligible employees of the Company and its
corporate affiliates.
REPORT OF COMPENSATION COMMITTEE
The information contained in this report shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the 1934
Securities Exchange Act, as amended, except to the extent that the Company
specifically incorporates it by reference in such filing.
The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for the Company's
executive officers and administering certain other compensation programs for
such individuals, subject in each instance to approval by the full Board. The
Compensation Committee also has the exclusive responsibility for the
administration of the Company's employee stock purchase plans and stock option
plans.
The fundamental policy of the Compensation Committee is to provide the
Company's chief executive officer and executive vice presidents with competitive
compensation opportunities based upon their contribution to the financial
success of the Company and their personal performance. It is the Compensation
Committee's objective to have a substantial portion of each officer's
compensation contingent upon the Company's performance as well as upon his or
her own level of performance. Accordingly, the compensation
19
package for the chief executive officer and executive vice presidents is
comprised of three elements: (i) base salary which reflects individual
performance and is designed primarily to be competitive with salary levels in
the industry, (ii) annual variable performance awards payable in cash and tied
to the Company's achievement of financial performance targets, and (iii)
long-term stock-based incentive awards which strengthen the mutuality of
interests between the executive officers and the Company's stockholders. As an
executive officer's level of responsibility increases, it is the intent of the
Compensation Committee to have a greater portion of his or her total
compensation be dependent upon Company performance and stock price appreciation
rather than base salary.
Several of the more important factors which the Compensation Committee
considered in establishing the components of each executive officer's
compensation package for the 2002 fiscal year are summarized below. Additional
factors were also taken into account, and the Compensation Committee may in its
discretion apply entirely different factors, particularly different measures of
financial performance, in setting executive compensation for future fiscal
years.
Base Salary. The base salary for each officer is determined on the basis of
the following factors: experience, personal performance, the average salary
levels in effect for comparable positions within and without the industry and
internal comparability considerations. The weight given to each of these factors
differs from individual to individual, as the Compensation Committee deems
appropriate. In selecting comparable companies for the purposes of maintaining
competitive compensation, the Compensation Committee considers many factors
including geographic location, growth rate, annual revenue and profitability,
and market capitalization. The Compensation Committee also considers companies
outside the industry which may compete with the Company in recruiting executive
talent.
Annual Incentive Compensation. Annual bonuses are earned by each executive
officer primarily on the basis of the Company's achievement of certain corporate
financial performance goals established for each fiscal year. For fiscal 2002,
the criteria for determination of payment of bonuses was based on the following
factors: (i) the Company's consolidated operating profit performance net of
certain non-recurring adjustments, relative to the target established by the
Compensation Committee, and (ii) the revenue and operating profit performance of
the respective division or subsidiary relative to the targets established by the
Compensation Committee. No bonuses were paid to executive officers during fiscal
2002.
Deferred Compensation Plan. The Company maintains a deferred compensation
plan, pursuant to which certain members of management (including the executive
officers) may elect to defer a portion of his or her annual compensation. The
participants' funds are invested among various funds designated by the plan
administrator and currently may not be invested in the Company's Common Stock or
other Company securities. Upon the death or retirement of a participant, the
funds attributable to the participant (including any earnings on contributions)
are distributed to the participant or the participant's beneficiary in a lump
sum or in annual installments over a period of three, five, ten or fifteen
years.
Long-Term Compensation. Long-term incentives are provided through stock
option grants. The grants are designed to align the interests of each executive
officer with those of the stockholders and provide each executive officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant allows the executive officer to
acquire shares of the Company's Common Stock at a fixed price per share (the
market price on the grant date) over a specified period of time (up to eight
years). Options granted become exercisable at the rate of 25% of the shares
subject thereto one year from the grant date and as to approximately 6.25% of
the shares subject to the option at the end of each three-month period
thereafter such that the option is fully exercisable four years from the grant
date, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide the maximum return to the
executive officer only if the executive officer remains employed by the Company
for the four-year vesting period, and then only if the market price of the
underlying shares of Common Stock appreciates over the option term. The number
of shares of Common Stock subject to each grant is set at a level intended to
create a meaningful opportunity for stock ownership based on the executive
officer's current position with the Company, the base salary associated with
that position, the average size of comparable awards
20
made to executive officers in similar positions within the industry, the
executive officer's potential for increased responsibility and promotion over
the option term, and the executive officer's personal performance in recent
periods. The Compensation Committee also takes into account the number of vested
and unvested options held by the executive officer in order to maintain an
appropriate level of equity incentive for that executive officer. However, the
Compensation Committee does not adhere to any specific guidelines as to the
relative option holdings of the Company's executive officers. The actual options
granted in fiscal 2002 to each of the current executive officers named in the
Summary Compensation Table is indicated in the Long-Term Compensation Awards
column.
Compensation of the Chief Executive Officer. The compensation of the Chief
Executive Officer is reviewed annually on the same basis as discussed above for
all executive officers. Dr. Straus' base salary for fiscal 2002 was
approximately $500,000 ($U.S.). Dr. Straus' base salary was established in part
by comparing the base salaries of chief executive officers at other companies
of similar size. Dr. Straus' base salary was at the approximate median of the
base salary range for presidents/chief executive officers of comparative
companies. Based on the Compensation Committee's criteria described above, in
fiscal 2002 Dr. Straus was awarded options to purchase 400,000 shares of Common
Stock at a purchase price of $9.24 per share and options to purchase 1,000,000
shares of Common Stock at a purchase price of $3.87 per share. Dr. Straus did
not receive a bonus during fiscal 2002.
The Company is required to disclose its policy regarding qualifying
executive compensation for deductibility under Section 162(m) of the Code which
provides that, for purposes of the regular income tax and the alternative
minimum tax, the otherwise allowable deduction for compensation paid or accrued
with respect to a covered employee of a publicly-held corporation is limited to
no more than $1 million per year. It is not expected that the cash compensation
to be paid to the Company's executive officers for fiscal 2002 will exceed the
$1 million limit per officer. The Company's 1993 Plan is structured so that any
compensation deemed paid to an executive officer when he or she exercises an
outstanding option under the 1993 Plan, with an exercise price equal to the fair
market value of the option shares on the grant date, will qualify as
performance-based compensation which will not be subject to the $1 million
limitation.
COMPENSATION COMMITTEE
Peter A. Guglielmi
Martin A. Kaplan
Kevin J. Kennedy
Casimir S. Skrzypczak
21
REPORT OF THE AUDIT COMMITTEE
The information contained in this report shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the 1934
Securities Exchange Act, as amended, except to the extent that the Company
specifically incorporates it by reference in such filing.
The following is the Report of the Audit Committee with respect to the
Company's audited financial statements for the fiscal year ended June 30, 2002,
which includes the consolidated balance sheets of the Company as of June 30,
2002 and 2001, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended June 30, 2002, and the notes thereto.
Review with Management
The Audit Committee has reviewed and discussed the Company's audited
financial statements with management.
Review and Discussions with Independent Auditors
The Audit Committee has discussed with Ernst & Young LLP, the Company's
independent auditors, the matters required to be discussed by SAS 61
(Codification of Statements on Accounting Standards) which includes, among other
items, matters related to the conduct of the audit of the Company's financial
statements.
The Audit Committee has also received written disclosures and the letter
from Ernst & Young LLP required by Independence Standards Board Standard No. 1
(which relates to the auditors' independence from the Company and its related
entities) and has discussed with Ernst & Young LLP its independence from the
Company.
Conclusion
Based on the review and discussions referred to above, the Audit Committee
recommended to the Company's Board that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
SUBMITTED BY THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS
Bruce D. Day
Peter A. Guglielmi
Richard T. Liebhaber
Casimir S. Skrzypczak
22
STOCK PERFORMANCE GRAPH
The following graph and table set forth the Company's total cumulative
stockholder return of an investment of $100 in June 1997 and ending June 2002
in: (i) the Company's Common Stock, (ii) the S&P 500 Index, (iii) the Nasdaq
Stock Market (U.S.) Index and (iv) the Nasdaq Telecommunications Index. Total
return assumes reinvestment of dividends. Historical stock price performance is
not necessarily indicative of future stock price performance.
[the following data also was represented as a line chart in the printed
material]
June 30,
------------------------------------------------------
1997 1998 1999 2000 2001 2002
------ ------ ------ --------- ------ ------
JDS Uniphase Corporation ................ $100 $216 $570 $3,293 $343 $ 73
S&P 500 Index ........................... 100 130 160 171 146 120
Nasdaq Stock Market ..................... 100 132 189 280 152 103
Nasdaq Telecommunications Index ......... 100 169 277 311 132 45
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and any persons who directly or
indirectly hold more than 10 percent of the Company's Common Stock ("Reporting
Persons") to file reports of ownership and changes in ownership with the SEC.
Reporting Persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received and written
representations from certain Reporting Persons that no such forms were required,
the Company believes that during fiscal 2002, all Reporting Persons complied
with the applicable filing requirements on a timely basis.
STOCKHOLDER PROPOSALS
In order for stockholder proposals to be considered properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice in writing to the Secretary of the Company. To be timely for the 2003
Annual Meeting of Stockholders (the "2003 Annual Meeting"), a stockholder's
notice must
23
be received by the Company at our principal executive offices not less than 30
days nor more than 60 days prior to the 2003 Annual Meeting; provided however
that in the event less than 40 days notice or prior public disclosure of the
date of the meeting is made or given to the stockholders, notice by the
stockholder to be on time must be received not later than the close of business
on the tenth day following the day on which notice of the 2003 Annual Meeting
was mailed or public disclosure was made. A stockholder's notice to the
Secretary must set forth as to each matter the stockholder proposes to bring
before the 2003 Annual Meeting: (i) a brief description of the business desired
to be brought before the 2003 Annual Meeting and the reasons for conducting such
business at the 2003 Annual Meeting; (ii) the name and record address of the
stockholder proposing such business; (iii) the class and number of shares of the
Company which are beneficially owned by the stockholder; and (iv) any material
interest of the stockholder in such business.
Stockholder proposals submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, and intended to be presented at the Company's
2003 Annual Meeting must be received by the Company not later than June 5, 2003
in order to be considered for inclusion in the Company's proxy materials.
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is intended that proxies in the enclosed form will be
voted in respect thereof in accordance with the judgments of the persons voting
the proxies.
ANNUAL REPORT ON FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, JDS UNIPHASE CORPORATION,
1768 AUTOMATION PARKWAY, SAN JOSE, CALIFORNIA 95131, THE COMPANY WILL PROVIDE
WITHOUT CHARGE TO EACH PERSON SOLICITED A COPY OF THE 2002 ANNUAL REPORT ON FORM
10-K, INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED
THEREWITH.
Appendix A to this Proxy Statement contains the Company's 2002 Annual
Report.
By Order of the Board of Directors,
/s/ Anthony R. Muller
Anthony R. Muller
Executive Vice President
Chief Financial Officer and Secretary
October 3, 2002
San Jose, California
24
APPENDIX A
2002 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JDS UNIPHASE CORPORATION
-------------------------------
2002 ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
Delaware 94-2579683
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1768 Automation Parkway, San Jose, California 95131
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 546-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value of $.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 Annual Report or any
amendment to this Annual Report. [ ]
As of August 16, 2002, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $3.0 billion, based upon
the closing sale prices of the common stock and exchangeable shares as reported
on the Nasdaq National Market and The Toronto Stock Exchange, respectively.
Shares of common stock and exchangeable shares held by executive officers,
directors and holders of more than 5% of the outstanding common stock and
exchangeable shares 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 16, 2002, the Registrant had 1,414,097,002 shares of common
stock outstanding, including 153,536,601 exchangeable shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III hereto is incorporated by
reference to the Registrant's definitive Proxy Statement in connection with the
2002 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission pursuant to Regulation 14A.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
This 2002 Annual Report contains information from JDS Uniphase
Corporation's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended June 30, 2002.
----------------------------------------------------
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report 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 "anticipate that," "believes," "can impact," "continue
to," "estimates," "expects to," "hopes," "intends," "plans," "to be," "will be,"
"will continue to be" or similar words. These forward-looking statements include
any statements we make, or implications suggested by statements we make, as to:
o the future prospects for and growth of our Company, our customers,
suppliers, competitors and our industry, including, without limitation,
(i) the extent and duration of the current economic downturn and the
impact of the downturn on our and our customers', suppliers', and
competitors' business, operations or financial condition, (ii) the timing
and extent of any recovery from such downturn, (iii) the viability,
development and growth of new fiberoptic telecommunications markets,
including metro markets, and (iv) the benefits and opportunities for us
and others in our industry provided by such new markets;
o the implementation of our Global Realignment Program, the timing and
extent of benefits we expect to receive as a result of the Program, and
the expected cost to complete the Program, including, without limitation,
(i) the level of the expected facility and workforce reductions, (ii) the
benefits we expect to receive from the elimination and consolidation of
programs and manufacturing facilities, and (iii) the benefits we expect to
receive from integrating our sales force and restructuring our customer
service programs;
o the capabilities of, and customer demand for, our products, the breadth
and scope of our product line, our ability to supply all of our customers'
component, module and subsystem needs and our ability to capitalize on
opportunities for module and subsystem level products;
o the extent and timing of any consolidation of customers, competitors or
suppliers in our industry;
o the demand for products providing greater integration and functionality,
and any system cost reductions resulting from the integration of
components into modules and subsystems;
o our customers' desire to (i) reduce the number of their outside vendors,
(ii) reduce the level of their vertical integration, and (iii) focus on
overall system design and architecture;
o our strategy for the future, our ability to implement such strategy
successfully at an acceptable cost and any benefits expected to be
realized through the implementation of such strategy, including our
strategies to (i) maintain close customer relationships, (ii) maintain
technology leadership, (iii) increase the level of integration and
functionality in our communications products, (iv) strengthen and develop
opportunities for our optical technology business, (v) focus on continuous
quality improvement, (vi) structure our manufacturing capabilities for
maximum efficiency and quality, (vii) pursue complementary mergers and
acquisitions, and (viii) develop our people;
o 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;
o our research and development programs, including, without limitation, the
costs thereof, the anticipated completion of our research and development
programs, new product introductions and projected revenue from new and
developing products and technologies;
o our employee relations;
o the timing and amount of inventory write-downs;
o the growth of the Internet and the demand for bandwidth;
A-2
o the impact on our business and financial condition of new accounting
pronouncements, including, but not limited to, Statement of Financial
Accounting Standards ("SFAS") No. 141, SFAS No. 142, SFAS No. 144 and SFAS
No. 146;
o the quality of our products and the timing and extent of product failures;
o the reliability and performance of our information technology
infrastructure;
o our beliefs regarding the merits and outcome of litigation, including,
without limitation, the pending securities class actions and related
litigation;
o our beliefs as to the value of our investments;
o our accounting policies (including, without limitation, our critical
accounting policies), the implementation of these accounting policies and
all estimates and assumptions we make in support of thereof (including,
without limitation, the reductions of goodwill and other long-lived assets
and inventory write-downs);
o the levels of future capital spending by telecommunications carriers;
o our future levels of gross margin, research and development and selling,
general and administrative expenses;
o the amounts and timing of any expected tax benefits;
o the amount of and our ability to realize our deferred tax assets and the
effect of deferred tax assets recorded for assumed employee stock options
on our provision or benefit for income taxes recorded in future periods;
o the timing and amounts of our future capital expenditures;
o the amount of cash expected to be used in fiscal 2003, and our beliefs as
to the adequacy of our existing cash balances and investments to meet our
liquidity and capital spending requirements at least through the next
twelve months; and
o the costs 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 risks and
uncertainties include, among other things, the risks that (i) the current
economic downturn may be more severe and long-lasting than we can anticipate,
and, notwithstanding our projections, beliefs and expectations for our business,
may cause our business and financial condition to suffer; (ii) due to the
current economic slowdown, in general, and setbacks in our customers'
businesses, in particular, predicting our financial performance and our success,
in general, for future periods is far more difficult than in previous periods;
(iii) 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; (iv) increasing pricing pressure, as the
result of the economic downturn and competitive factors, may harm our revenue
and profit margins; (v) 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 (vi) 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 to conform such statements to actual
results or to changes in our expectations.
A-3
PART I
ITEM 1. BUSINESS
General
We are a worldwide leader in optical technology. We design and manufacture
products for fiberoptic communications, as well as for markets where our core
optics technologies provide innovative solutions for industrial, commercial and
consumer applications. Our fiberoptic components and modules are deployed by
system manufacturers for the telecommunications, data communications and cable
television industries. We also offer products for display, security,
medical/environmental instrumentation, decorative, aerospace and defense
applications.
We were incorporated in California in May 1979 and reincorporated in
Delaware in October 1993. We are the product of several significant 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. During fiscal 2002, we acquired IBM's optical transceiver
business on December 28, 2001.
Fiberoptic communications, including telecommunications, data
communications and cable television, is our largest business. Fiberoptic
communications systems deliver video, audio and text data over high-capacity
fiberoptic cables. Although ultimately highly complex, a fiberoptic
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 fiberoptic
components, modules and subsystems, alone and in combinations, are the building
blocks for these systems. These products include transmitters, receivers,
amplifiers, dispersion compensators, multiplexers and demultiplexers, add/drop
modules, switches, optical performance monitors and couplers, splitters and
circulators. Complementing our components, modules and subsystem products, our
test and measurement equipment is used in manufacturing, research and
development, system development and network maintenance environments for
measuring performance of optical components. We sell our communications products
to the world's leading and emerging telecommunications, data communications and
cable television systems providers worldwide.
In addition to our communications business, we have a growing optical
technology business. Products of this business incorporate optical technologies
to control, enhance and modify the behavior of light utilizing its reflection,
absorption and transmission properties to achieve specific effects such as high
reflectivity, anti-glare and spectral filtering. End-market applications include
computer monitors and flat panel displays, projection systems, photocopiers,
facsimile machines, scanners, security products and decorative surface
treatments. We also supply commercial laser products for biotechnology, graphic
arts and imaging, semiconductor processing, materials processing, and a wide
variety of other laser-based applications, as well as gas cluster ion beam
surface equipment used in, among other things, the semiconductor and biomedical
industries.
Industry Environment
During the second half of the 1990's through 2000, the telecommunications
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:
o the introduction of wavelength division multiplexing ("WDM") technology,
under which multiple light signals are transmitted down a single optical
fiber cable. WDM allowed the expansion of fiberoptic network capacity
without the expense and time required to install additional fiber cable,
and provided greater capacity on new fiber;
o the unprecedented growth 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");
A-4
o the Telecommunications Act of 1996, which purported 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
o an abundance of relatively low cost capital available for new company
formation, network development and expansion.
Together, these factors engendered the rapid and substantial installation
of fiberoptic networks, largely financed by debt, in anticipation of rapidly
growing bandwidth demand and future sales. As a result of the constantly
increasing demand, we focused much of our efforts on expanding 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. Consequently, our sales grew rapidly,
increasing from $87.1 million for the quarter ended June 30, 1999 to $925.1
million for the quarter ended December 31, 2000.
Since the beginning of 2001, the telecommunications industry has
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 is attributable to, among other
things:
o network overcapacity, as bandwidth demand, while continuing to grow, did
not reach levels sufficient to match the pace of network deployment;
o constrained capital markets;
o financial difficulties of certain major telecommunications carriers; and
o other factors, including the general inability of the CLECs to obtain
sufficient access to established telecommunications infrastructures, and
consolidation among telecommunications carriers.
All of these factors resulted in a severe decline in overall demand for new
fiberoptic networks and the components and modules used therein. During 2001 and
continuing into 2002, our telecommunications systems manufacturing customers
worked to reduce their inventories of components and modules purchased from our
competitors and us. Excess network capacity and limited availability of capital
for network installation and expansion have constrained the ability of these
inventories to be absorbed quickly. As the downturn deepened and continued into
2002, many telecommunications systems manufacturers and their carrier customers
were faced with insufficient revenues and cash reserves to service and repay the
significant debt they incurred during the prior growth period. Some of these
companies are working to restructure their debt, including, in the case of
carriers such as WorldCom and Global Crossing, through bankruptcy proceedings.
Some of these companies may not be successful in such efforts, in which event
they will be liquidated or acquired and consolidated. In the current
environment, these debt obligations continue to severely limit the funds
available for telecommunications equipment purchases and, thus, purchases of our
products. Also, over the last eighteen months many of the CLECs have gone out of
business, reducing the demand for new networks. As a result, the overall market
for new telecommunications systems and, accordingly, our products, has declined.
The impact of industry consolidation, continued inventory reductions among
our customers, increasing debt concerns at the systems manufacturer and carrier
levels, network overcapacity, and extremely limited access to capital for
network installation and expansion has severely harmed our business. We are not
anticipating any significant recovery in these markets at this time.
Nevertheless, we believe the telecommunications industry will ultimately
rebound from the current economic downturn and grow in the future for several
reasons:
Internet traffic, an important driver of network expansion, is expected to
continue to grow;
o Internet traffic is increasingly expected to include content such as full
motion video (including high definition video) and multichannel high
quality audio, the delivery of which will place great demands on available
bandwidth. In particular, the entertainment industry is currently working
on the delivery of music and films over telecommunications systems;
o North America and Europe have comprised the majority of optical networking
deployment, but there could be significant additional potential with the
eventual development of other geographical markets, including Latin
America and Asia;
A-5
o Fiberoptic 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
remain largely untapped. We believe these markets represent a significant
future opportunity for our industry and for us. Moreover, we anticipate
that installation of metro fiberoptic systems will increase demand for
long-haul capacity as overall network traffic expands; and
o The demand for client-side or enterprise-level communications networks is
expected to continue to increase as global organizations continue to
upgrade and expand their information systems.
Consequently, we anticipate that over the long-term, fiberoptic
communications network development and expansion both through the installation
of new networks and through the upgrade and expansion of existing networks will
continue. 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.
In the meantime, while we continue to experience weakness in the
telecommunications industry, our optical technology businesses have made
significant contributions to our operating results, experiencing sales growth
for many of their products in areas such as projection display and security
markets. In addition, sales have been relatively stable for commercial lasers
for biotechnology, graphic arts and imaging, semiconductor processing and other
applications.
As a result of the economic downturn, our results of operations and
financial condition were significantly affected by charges related to our Global
Realignment Program, the write-downs of inventories, and the impairment of our
investments and long-lived assets during fiscal 2002 and 2001. Please refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Notes to the Consolidated Financial Statements under
Item 8 of this Annual Report for further discussion on these charges.
Global Realignment Program
In April 2001, we initiated our Global Realignment Program, under which we
are restructuring our business in response to the current and anticipated market
environment and as part of our continuing efforts to integrate our operations.
Specific actions included the following:
o We have terminated 15,450 employees under the Global Realignment Program.
As of June 30, 2002, we had 9,222 employees.
The following table presents a history of our employment levels:
Number of
Date Employees Explanation
---- ----------- -----------
March 2001: 28,677 Our highest employment level.
Attrition and workforce reductions prior to the inception of the
Less: (2,446) Global Realignment Program.
------
Employment level at the inception of the Global Realignment
April 2001: 26,231 Program.
Less: (15,450) Employees terminated under the Global Realignment Program.
Less: (1,559) Attrition not part of the Global Realignment Program.
-------
June 2002: 9,222 Employment at the end of fiscal 2002.
=======
o We are eliminating some product development programs and consolidating or
curtailing others in order to focus our research and development
investments on the most promising projects in both the Transmission and
Network Components Group and the Thin Film Products and Instrumentation
Group.
o We are consolidating our manufacturing, research and development, sales
and administrative facilities through building and site closures. As of
June 30, 2002, 25 sites in North America, Europe and Asia-Pacific have
been closed or were scheduled for closure. The process involves
consolidating product lines, standardizing on global product designs, and
transferring manufacturing to optimum locations.
A-6
The 25 sites closed or scheduled for closure were as follows:
North America: Asheville, North Carolina; Columbus, Ohio;
Eatontown, New Jersey (1); Freehold, New Jersey;
Gloucester, Massachusetts; Manteca, California; Ottawa,
Ontario (2 sites); Piscataway, New Jersey; Richardson,
Texas; Rochester, New York; San Jose, California (2);
Toronto, Ontario; Victoria, British Columbia.
Europe: Arnhem, Netherlands; Bracknell, United Kingdom; Hillend, United Kingdom;
Oxford, United Kingdom; Plymouth, United Kingdom; Torquay, United
Kingdom; Waghaeusel-Kirrlach, Germany; Witham, United Kingdom.
Asia-Pacific: Shunde, China; Sydney, Australia; Taipei, Taiwan.
------------
(1) Portions of the operations at the Eatontown, New Jersey site are to
be relocated.
(2) The operations located in the San Jose, California site are related to
our commercial laser unit, which will be relocated to Santa Rosa,
California.
o We are aligning our sales organization in the communications business to
offer customers a single point of contact for all of their product
requirements, and creating regional and technical centers to streamline
customer interaction with product line managers.
In response to the continued business downturn, we are planning further
restructuring activities under the Global Realignment Program, including further
reductions of employment, consolidations of facilities and additional site
closures. Prior to the inception of the Global Realignment Program in April
2001, our annual spending rate excluding inventory costs was approximately $1.7
billion. We expect to reduce our annual expenses by approximately $1.2 billion
after its complete implementation in calendar year 2004. We believe that the
measures taken under the Global Realignment 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. However, the Global Realignment Program may not be successful in
achieving the expected cost reductions or other 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.
Acquisitions
Notwithstanding the current economic downturn, we are committed to
continuing to evaluate strategic opportunities and pursue acquisitions of
additional products, technologies or businesses that are complementary to or
broaden the markets for our products. During fiscal 2002, we acquired IBM's
optical transceiver business and Scion.
IBM's Optical Transceiver Business:
- -----------------------------------
In December 2001, we acquired IBM's optical transceiver business. Products
from the optical transceiver business include small form factor transceivers and
gigabit interface converters for storage area networks and local area networks
using optical fiber channel and gigabit Ethernet protocols. These products
expand our transmission module product line in metro, storage and enterprise,
long reach, short reach, and very short reach applications. The acquisition adds
significantly to our expertise in integrated circuit design; low cost, small
form factor packaging; and low cost materials and assembly techniques that are
critical for high volume data communications applications.
Under the terms of the acquisition, we paid IBM $100.0 million in cash and
issued 26.9 million shares of our common stock valued at $232.3 million using an
average market price of $8.65 per share. In addition, we may be required to make
an additional payment of up to $85.0 million in cash or common stock in the
first half of calendar year 2003 based on the financial performance of the
optical transceiver business.
Scion:
- ------
In April 2002, we acquired Scion, a supplier of application specific
photonic solutions based on planar lightwave circuit manufacturing. We believe
the acquisition will position us to deliver a variety of present and future
silica-based waveguide devices by leveraging Scion's extensive knowledge and
experience in semiconductor
A-7
process manufacturing. Prior to the acquisition, we were a minority shareholder
of Scion with an investment of $5.0 million, or approximately 6% ownership. The
consideration consisted of an additional $45.4 million in cash to complete the
acquisition. We also incurred an estimated $0.1 million in direct transaction
costs.
Please refer to "Note 12. Mergers and Acquisitions" of Notes to
Consolidated Financial Statements under Item 8 of this Annual Report for further
discussion of these two acquisitions.
Operating Segments and Products
We operate in two principal segments through which we develop and
manufacture our telecommunications and non-telecommunications products: (i)
Transmission and Network Components, which accounted for approximately 70% of
our net sales in fiscal 2002, and (ii) Thin Film Products and Instrumentation,
which accounted for approximately 29% of our net sales in fiscal 2002. Please
refer to "Note 13. Operating Segments and Geographic Information" of Notes to
Consolidated Financial Statements under Item 8 of this Annual Report for further
discussion of our operating segments.
Transmissions and Network Components:
- -------------------------------------
Our telecommunication systems customers focus on developing and installing
increasingly flexible, dynamic, efficient and robust high-capacity
communications networks. We offer solutions in four key areas: (i) increasing
capacity through higher transmission speeds and the use of multi-channel
signals; (ii) providing greater reach through amplification to reduce or
eliminate the need for costly electrical signal regeneration; (iii) adding
flexibility with tunable and dynamic routing to allow fast system
reconfiguration to meet usage demand; and (iv) improving reliability with
optical monitoring and protection products to minimize downtime.
Our fiberoptic communications 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 also leverage
our broad-based component portfolio to provide higher levels of integration in
modules and subsystems to create a value-added solution for our customers. Our
product families are described below.
Source Lasers: At the front end of the network, a source laser provides 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. We produce both continuous wave lasers for external modulation as
well as directly modulated lasers for a variety of telecom and cable television
systems.
Photodetectors and Receivers: Photodetectors and receivers detect the
optical signals and convert them back into electronic signals. Photodetectors,
when co-packaged with an electronic preamplifier, are referred to as receivers.
We supply optical photodetectors and receivers for fiberoptic telecommunications
and cable television networks. Receivers are used in WDM products for each
channel at both ends of the fiberoptic link as wavelength translation is
required. Photodetectors are also used throughout a network to monitor a variety
of characteristics including power levels and channel count.
Modulators: Modulators turn light on and off external to the source laser
to encode the information being sent through the network. External modulation
can be achieved either by using a separate discrete modulator or by
monolithically integrating a laser and modulator. We supply both types of
modulators. The highest performance is obtained with a discrete external
modulator.
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.
Transmitters: We manufacture transmitters that combine source lasers,
modulators, wavelength lockers and electronic drivers so that the optical signal
is created and encoded in a single package.
Transceivers: Transceivers combine transmitters with receivers so that
signals can be generated and encoded, and received and detected in a single
package. These modules would be installed at both ends of a system. We
A-8
supply transceivers in various form factors and specifications to both the data
communications and telecommunications markets. The product family includes
variable-bit-rate receivers, and OC-48 transceivers that operate over extended
temperature ranges.
Transponders: Transponders are signal receivers or transmitters that
respond to or send signals. Transponders are often used as input interfaces
between the optical and electrical signals for WDM systems.
Telecommunications Specialty Modules and Instruments: We supply a number of
specialty products for multi-gigabit fiberoptic systems. In particular, we
provide some of the transmit/receive instrumentation modules used to design and
test such systems.
Cable Television Transmitters and Amplifiers: In cable television networks
we supply externally modulated transmitters and amplifiers 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.
Amplifiers: We supply both Erbium-doped fiber amplifier ("EDFA") optical
amplifiers and Raman amplification pump modules. These products are designed to
boost the WDM optical signals without reconversion to 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. 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 (wavelength tailored) pump lasers that are utilized in
Raman modules to create gain in the transmission fiber, allowing the signal to
travel farther without electrical regeneration.
Add-Drop Multiplexers: We supply add-drop multiplexers that allow systems
to add and drop optical wavelengths without reconversion to an electrical
signal. For example, a system operating from San Francisco to New York can drop
one wavelength in Chicago and add another allowing for greater network
flexibility. The modules include multiple components such as switches,
wavelength mutiplexers/demultiplexers devices, and attenuators.
WDM Couplers, Filters, Isolators and Circulators: Wavelength division
multiplexer couplers are used to split and combine signals of different
wavelengths in an optical network. We supply WDM demultiplexers and access/
bi-directional couplers. These products are based on thin-film filters, arrayed
waveguide gratings, fused fiber couplers, microlenses and/or special optical
materials.
Isolator products are used to allow light signals in a network to propagate
in one direction within a network, but prevent that signal from returning in the
opposite direction. Circulators also allow light in a system to flow in only one
direction, but have multiple ports and use these multiple ports to perform a
routing function within the network. We supply various types of isolators and
circulators including tunable narrow-bandpass filters that are
wavelength-tunable by voltage control.
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. We supply both discrete devices and modules
containing a number of these components.
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.
The following are some of the significant products introduced by the
Transmission and Network Components operating segment during fiscal 2002:
o 2 gigabits/sec fiber channel transceivers are designed to meet the growing
bandwidth needs of storage area networking customers. Their function is to
provide the optical to electrical conversion interface allowing servers
and storage systems to communicate over fiberoptics cables at twice the
speed of traditional 1 gigabit devices.
A-9
They feature the LC optical connector, are available in pluggable and pin
through hole form factors and are available with 850-nanometer or
1310-nanometer lasers for operation at hundreds of meters or multiple
kilometers.
o Continuous wavelength temperature tunable lasers are designed for dense
wavelength division multiplexing ("DWDM") fiberoptic communications.
Temperature tunable over four 50 Ghz channels, they can simplify
procurement and logistics and reduce spare part inventory when compared to
using fixed wavelength models, which require one part for every channel.
Packaged in the industry standard 14-pin butterfly package and using the
same technology as fixed wavelength sources, these lasers can be easily
implemented into existing DWDM, cable television and hybrid fiber-coax
networks with minimal re-design.
o OA series EDFAs are designed for DWDM telecommunications systems. OA
Series EDFAs offer a low-cost, quick turnaround alternative to customized
EDFAs. Small- and medium-sized system providers can obtain high
performance with the OA Series without requiring the resources needed for
custom development. Large system providers can improve their
time-to-market by using OA Series EDFAs during their prototype cycles
prior to developing custom amplifiers or they can eliminate custom
development by specifying the OA Series for their production systems.
o Wavelength blockers ("WB") are designed for use in next generation
dynamically reconfigurable fiberoptic communication systems. Using an
all-optical design, the WBs can attenuate or block any number of
wavelengths and be reconfigured remotely to select alternative wavelengths
in milliseconds. The WBs are part of a new family of products that
represents what we believe to be an important application of technology
that can be used to reduce operating and capital costs of optical networks
for carriers. The all-optical design enables remote, dynamic channel
reconfiguration and offers significant cost savings when compared to
current methods that use optoelectronic regenerators or require the
installation of new equipment or costly manual adjustments for
reconfiguration.
o 980-nanometer uncooled pump lasers provide high-power pump lasers that do
not require any active cooling. These pump lasers eliminate the need for
additional components and electronics for temperature control, and use
considerably less operating power than standard cooled pump lasers. As a
result, they have fewer parts, cost less, and are more efficient. They
also feature fiber Bragg grating wavelength stabilization.
o Multi-source agreement ("MSA")-compatible transponders are designed for
2.5 gigabits/sec and 10 gigabits/sec fiberoptic telecommunication and data
communications systems. These modules operate at the most popular data
rate for installed systems and conform to MSA optical, electrical, and
mechanical standards. They are used for a variety of applications,
including metro area networks, local area networks, and fiber backbone
infrastructure elements.
Thin Film Products and Instrumentation:
- ---------------------------------------
Our Thin Film Products and Instrumentation operating segment includes the
following three businesses: (i) products using thin film coating technologies;
(ii) commercial laser products, and (iii) test instruments for evaluating the
performance of optical components.
Thin Film Products:
Optical thin film coatings are microscopic layers of materials, such as
silicon and magnesium fluoride, applied to the surface of a substrate, such as
glass, plastic or metal, to alter its optical properties. Thin film coatings
work by controlling, enhancing or modifying the behavior of light to produce
specific effects such as reflection, refraction, absorption, abrasion
resistance, anti-glare and electrical conductivity. This control is achieved as
a result of the optical properties, number of layers and thickness of the thin
film coatings in relation to wavelengths of light. The ability to control the
behavior of light using thin film coatings plays a critical role in many
industries and products.
Light Interference Pigments. Light interference pigments create unique
color shifting characteristics utilized in security products and decorative
surface treatments. Our security products are light interface pigments, which
allow ink to exhibit different colors from different viewing angles. The
pigments are used to inhibit counterfeiting of currencies and other valuable
documents such as passports and credit cards. Our decorative products utilize
the
A-10
same manufacturing processes as our security products, but are designed to have
certain color characteristics that make it attractive for applications in
paints, cosmetics and plastics. The pigments create a durable color shifting
finish when used in these applications.
Applied Photonics. This category includes our products in three key
markets: display, aerospace and instrumentation, and office automation. In the
display market, we manufacture and sell optical components and front surface
mirrors used in cathode ray tube ("CRT") displays, flat panel displays and
projection display products such as large-screen projection televisions and
business projection systems. The aerospace and instrumentation markets require
sophisticated, high-precision coated products and optical components that
selectively absorb, transmit or reflect light in order to meet the specific
performance requirements of advanced systems. Our products include infrared
filters, beam splitters and optical sensors for aerospace applications, optical
filters for medical instruments and solar cell covers for satellite. Our
products in the office automation market include photoreceptors and front
surface mirrors for photocopiers, document scanners, overhead projectors,
facsimile machines and printers.
Commercial Lasers:
Our laser subsystems products are used in biotechnology, graphic arts and
imaging, semiconductor processing, materials processing, and a wide variety of
other laser-based applications. These 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, ultraviolet and 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.
Our helium-neon lasers have become the industry standard for many
applications. They are small, stable, have instant-on capability and are
currently deployed in advanced applications such as digital radiography. Our
air-cooled argon laser subsystems feature an integral-mirror and metal-ceramic
laser tube. Other products include a new generation of diode-pumped solid state
lasers, indium gallium arsenide and aluminum gallium arsenide laser diodes, and
fiber lasers deployed in marking and materials processing applications.
Instrumentation:
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 fiscal 2002, we introduced
our Multiple Application Platform ("MAP"), the next generation platform for our
line of fiberoptic test and measurement instrumentation. MAP provides a wide
range of test and measurement switches and attenuators in a modular and
upgradeable architecture suitable for research and development and manufacturing
environments.
The following are some of the significant products introduced by the Thin
Film Products and Instrumentation operating segment during fiscal 2002:
o Spectraflair is the first diffractive color-shifting pigment, combining
thin film interference technology with diffractive technology. The
pigments are used in decorative coatings in automobile and other markets
to provide greater brand recognition and product differentiation.
o xL 2002 light pipes are designed for liquid crystal-based projection
systems such as rear projection TVs and front projectors. They can be used
in both transmissive liquid crystal displays and reflective liquid crystal
on silicon displays, convert light of the unwanted polarization state to
the design polarization state, providing more efficient use of the light
from the lamp. The xL 2002 light pipes, a low-cost alternative to other
polarization conversion systems, provide increased transmission efficiency
and eliminate the need for a pre-polarizer without the penalty typically
associated with polarization conversion.
o MAP offers a wide range of test and measurement switches and attenuators
in a modular and upgradeable architecture designed for manufacturing and
R&D environments. MAP is based on a standard, rack-mountable, 19" chassis
that accepts up to eight cassettes. This design allows for the modular
expansion of test and measurement instruments and reduces costs and space
used as compared with purchasing discrete, specialized instruments. The
cassettes can be of the same or different configuration, and up to seven
slave chassis can be cascaded to the main chassis for a total of 64
cassettes.
A-11
o S-series diode-pumped solid-state lasers are smaller than previous designs
and feature a controller that requires less power and produces less heat
than other available models. As a result, they are easier to integrate
into instruments and help save space and reduce cost. The lasers have
multiple applications in the biomedical industry. For example, they can be
used as an illumination source for instruments such as DNA sequencers and
flow cytometers. They can be more easily integrated into these and other
instruments due to its small size, efficiency and good performance.
Competitive Environment
We compete against numerous fiberoptic component, module, subsystem and
instrumentation manufacturers, including independent merchant suppliers and
business units within vertically integrated equipment manufacturers, some of
whom are also our customers. A partial list of these competitors includes: Agere
Systems, Agilent Technologies ("Agilent"), Alcatel Optronics, Avanex, Bookham
Technology, Chorum Technologies, Corning, DiCon Fiberoptics, Exfo, Finisar,
Fujitsu, Furukawa Electric, Intel, New Focus, Nortel Networks ("Nortel"), Oplink
Communications, OpNext and Sumitomo Electric. In addition to these established
companies, we also face competition from emerging start-up companies. While each
of our product families has multiple competitors, we believe that we have the
broadest range of products and technology available in the industry. We also
believe that this range of products and technology will help position us well in
the industry as it continues to move towards module and subsystem level
products. Due to the economic downturn and changes within the telecommunications
industry, some of our competitors have recently announced their plans to sell or
discontinue their fiberoptic communications businesses, and we expect that there
will be further consolidation in our industry.
We believe that established fiberoptic communications system suppliers will
continue to seek more integration and module-level solutions from their vendors.
This approach provides the following potential advantages: (i) it allows our
systems manufacturing customers to focus on the overall system design and
architecture of their products and (ii) it also may allow them to reduce their
cost structure and decrease their time to market. In this environment, we
believe that our experience with a broad range of products and technologies
gives us an advantage in designing module-level solutions and in assisting
customers in the application of these products throughout their networks.
Moreover, we believe that telecommunications systems manufacturers will
seek further to 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, commitment to research and development, and high
qualification standards increasingly position us to compete to be the supplier
of choice to these companies now and in the future.
In our optical technology businesses, we strive to be a principal supplier
to most of our key customers. In the security market, we face competition from
alternative anti-counterfeiting devices such as holograms, embedded threads and
watermarks. In the decorative market, we face competition from providers of
lower cost, lower performance special effect pigments, including BASF and Merck
KGaA. In the flat panel display market, we face competition from Japanese
coating companies such as Nidek, Toppan and Tore. In projection display
components, our competition includes Viratec, Nitto Optical, Nikon and Fuji
Photo-Optical. We provide commercial laser products to OEM suppliers for
biotechnology instruments, reprographics, and semiconductor capital equipment
manufacturers and compete with companies such as Coherent, Melles Griot and
Spectra-Physics.
Strategy
Our objective is to continue to be a leading supplier of components,
modules and subsystems for fiberoptic communications and to maintain or expand
our position in other markets where there is demand for our optics technologies,
including display, security, medical/environmental instrumentation, decorative,
aerospace and defense applications.
The key elements of our strategy include:
o Maintaining 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 their entire component and module
needs through customized design and
A-12
manufacturing, aligned with the requirements of their systems. Maintaining
and strengthening these relationships is particularly critical during the
current telecommunications 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.
o Maintaining technology leadership. We believe that our technology and
product leadership is a significant advantage and we will continue to
develop our core competencies in what we believe are the enabling
technologies to address current and future needs in our key markets. The
application of optical technology to provide innovative solutions for
industrial, commercial and consumer applications is a common goal for our
employees and our customers across market and geographical boundaries. To
continue to provide technology leadership, we expect to continue to
develop new products, offering increased efficiency, performance and
functionality, and with higher levels of integration, to our customers. We
endeavor to anticipate and respond to changes in market conditions and
demands by adapting our organization and targeting and investing in the
technologies and applications that offer the most promising opportunities
for the future.
o Increasing the level of integration and functionality in our
communications products. 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 and future
growth. Our stability and broad product portfolio offer potential benefits
to customers who are designing future platforms and want high assurance of
the reliability of supply and/or can achieve economies in procurement and
logistics by choosing one supplier in place of several. In addition, our
customers continue to seek an increase in the level of integration and
functionality in the optoelectronic and optical products they purchase
from their suppliers. We believe that greater integration and increased
functionality for components, modules and subsystems will reduce overall
system costs. Furthermore, we believe that by reducing the amount of
component integration and number of manufacturing steps required to be
performed by our customers, our customers can focus on building system
architectures and maintaining core competencies and related competitive
strengths. We believe that our broad core competencies in optical
components, together with our strong customer relationships, will enable
us to successfully continue to develop and manufacture products offering
these levels of integration and functionality to our customers.
o Strengthening and developing opportunities for our optical technology
businesses. We are increasing our efforts to capitalize on our core optics
competence in our optical technology markets. Despite the current economic
downturn, our display and security businesses have grown. For example,
people are investing in new entertainment systems for their homes, leading
to an increase in sales for our products used for projection displays.
Moreover, as governments around the world are seeking new ways to keep
their valued documents secure, our sales for security markings have grown.
We believe these and other opportunities for our optical technologies
businesses will be important to our future success.
o Focusing on continuous quality improvement. We are committed to continuous
improvement in the quality of our products and processes. This commitment
includes efforts to minimize product failures in part by learning from
those that do occur, improve the performance and reliability of our
products as well as the manufacturing processes used to provide our
products. We also strive for continuous improvement in our customer
relationships including pre-and post-sales services and understanding and
responding to customer requirements.
o Structuring our manufacturing capabilities for maximum efficiency and
quality. Prior to the industry downturn and 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. We have shifted our manufacturing focus from
capacity expansion to maximizing efficiency and quality. 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 customers' quality and performance
requirements. When our Global Realignment Program is completed, we expect
production to be centralized in designated competency centers in order to
enhance productivity and quality 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 Shenzhen, China.
A-13
o Pursuing complementary mergers and acquisitions. We are the product of
several strategic mergers and acquisitions. Notwithstanding the current
downturn, we continue to believe that complementary acquisitions and other
strategic transactions will be important to our future success.
Accordingly, we continue actively to evaluate and pursue opportunities to
invest in, acquire and develop strategic relationships with other
businesses in circumstances that we believe meet our other strategic
objectives.
o Developing our people. Our management and employees have formed a culture
of innovation, adaptability and resilience that has proven its strength
through extreme changes in the market. We are focused on retaining key
contributors, developing our people and nurturing this level of
commitment.
Although we expect to be successful in implementing our strategy, many
factors, some within and some outside of 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 products primarily to original equipment manufacturers,
distributors and strategic partners in North America, Europe and Asia-Pacific.
Our sales organizations communicate directly with customers' engineering,
manufacturing and purchasing personnel in determining the design, performance
and cost specifications for customer product requirements. Our customers for
fiberoptic communications solutions include Agilent, Alcatel, Brocade
Communications, Ciena, Cisco Systems, Corning, Corvis, Extreme Networks,
Fujitsu, Hewlett-Packard, IBM, Innovance Networks, Lucent, Marconi, Nortel,
Scientific-Atlanta, Siemens, Tellabs and Tyco. Our customers for optical
technology products include Agilent, Applied Biosystems, ASML, Coulter, Eastman
Kodak, Hitachi, Mitsubishi, SICPA, Texas Instruments and Toshiba.
During fiscal 2002, no customer accounted for more than 10% of net sales.
During fiscal 2001, Nortel, Alcatel and Lucent accounted for 14%, 12% and 10% of
net sales, respectively. During fiscal 2000, Lucent and Nortel accounted for 21%
and 15% of net sales, respectively. Although no customer accounted for more than
10% of net sales in fiscal 2002, we expect that, for the foreseeable future,
sales to a limited number of customers will continue to account, alone or in the
aggregate, for a high percentage of our net sales.
We believe that a high level of customer support is necessary to develop
and maintain long-term relationships with our customers. 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 customers through our
offices in North America, Asia and Europe. In connection with our Global
Realignment Program, we are aligning our sales organization in the
communications business to offer customers a single point of contact for all of
their product requirements, and creating centers of excellence to streamline
customer interactions with product line managers. We are also continuing to
consolidate administrative functions to provide improved customer service and
reduce our costs.
Research and Development
During fiscal 2002, 2001 and 2000, we incurred research and development
expenses of $254.8 million, $325.9 million and $113.4 million, respectively.
We devote substantial resources to research and development in order to
develop new and enhanced fiberoptic components, modules and subsystems, as well
as thin film products, commercial lasers and test instruments. Once the design
of a product is complete, our engineering efforts shift to enhancing both the
performance of that product and our ability to manufacture it at high volumes
and at lower cost. For the communications marketplace, we are consolidating
research and development to strategically important areas. For example, we are
increasing our investment in the following: (i) transmission module products, by
leveraging our strength in components, module design and packaging to
manufacture integrated products such as transceivers for telecommunications,
data communications and cable television applications, and (ii) waveguide
devices, by leveraging our knowledge and experience in semiconductor process
manufacturing.
In our optical technology businesses, we devote substantial resources to
research and development to, among other things, develop new and improved thin
film products, processes and manufacturing equipment. Our research
A-14
and development efforts concentrate on developing more innovative solutions such
as economical and commercially suitable light interference pigments, color
separation filters and various components for optical systems, thin film design
capabilities for display and instrumentation markets, coating processes for
optical components to meet high component volume requirements, and high yield
processes for complex coatings and high volume assembly capabilities.
In response to the economic downturn, we have reduced our research and
development expenditures. Our total number of employees engaged in research and
development has decreased to 1,240 as of June 30, 2002, compared to 2,350 as of
June 30, 2001. 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. Our goal is to
allocate our resources both geographically and technologically to products and
technologies that we believe will be most important to our customers.
Manufacturing
The following table sets forth our manufacturing locations and the primary
products manufactured at each location as of June 30, 2002:
Location Products
-------- --------
NORTH AMERICA:
- --------------
Canada:
Ottawa Wavelength division multiplexers, blockers, equalizers, circulators, switches,
tunable filters, waveguides, dispersion compensation modules attenuators, and
instrumentation and control products
Toronto (1) Optical performance monitors
United States:
Columbus, OH (1) Arrayed waveguide products
Eatontown, NJ (1) EDFA optical amplifiers
Horsham, PA Transceivers and transmission modules
Manteca, CA (1) Laser subsystems
Melbourne, FL Transceivers, transponders and instrumentation products
Raleigh, NC (2) Micro-electro-mechanical-systems
San Jose, CA Wavelength division multiplexers, Raman pumps, pump lasers, couplers,
wavelength lockers, filters, hybrid modules, isolaters, arrayed waveguide products
and commercial lasers
Santa Rosa, CA Thin film filters, optical display and projection products, light interference
pigments for security and decorative applications, and laser subsystems
West Trenton, NJ Photodetectors and receiver products
Windsor, CT Lithium niobate modulators, wavelength lockers and electronic drivers for
telecommunications
EUROPE:
- -------
Germany:
Waghaeusel-Kirrlach (1) Waveguide splitters and splitter shelves
Netherlands:
Eindhoven Source lasers and semiconductor optical amplifiers
United Kingdom:
Torquay (1) Fused fiber components
A-15
Location Products
-------- --------
REST OF WORLD:
- ---------------
Australia:
Sydney (1) Fiber Bragg gratings
China:
Beijing Light interference pigments for security and decorative applications
Fuzhou YVO4 and specialty optics
Shenzhen Variety of standard passive optical components
- ------------
(1) As of June 30, 2002, these manufacturing locations have been scheduled for
closure under the Global Realignment Program. Products manufactured at these
locations may be transferred to other locations.
(2) On August 1, 2002, we entered into a definitive agreement to sell most of
the assets used in this location to MEMSCAP. Please refer to "Note 15.
Subsequent Events" of Notes to Consolidated Financial Statements under Item
8 of this Annual Report for further discussion.
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 our 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. As of June 30, 2002, we held 794
U.S. patents and 501 foreign patents.
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, 2002, our
backlog was approximately $178.7 million as compared to $677.0 million at June
30, 2001. Orders in backlog are firm, but are subject to customers' cancellation
or rescheduling. 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. As a result of the current industry downturn, our ability to translate
our backlog 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
We had 9,222 employees as of June 30, 2002, compared to 19,948 employees as
of June 30, 2001. The reduction in our workforce in fiscal 2002 was primarily a
result of our Global Realignment Program. Our workforce as of June 30, 2002
included 6,509 employees in manufacturing, 1,240 employees in research and
development, 1,008 employees in general management and administration, and 465
employees in sales and marketing.
Our employees are not represented by any collective bargaining organization
except for our operations in France, Germany and Netherlands. We have never
experienced a work stoppage, slowdown or strike. Notwithstanding the current
economic downturn, we consider our employee relations generally to be good.
A-16
Executive Officers
The following sets forth certain information regarding our executive
officers as of August 16, 2002:
Name Age Position
- ---- --- --------
Jozef Straus, Ph.D. 56 Co-Chairman and Chief Executive Officer
Donald Scifres, Ph.D. 55 Co-Chairman and Chief Strategy Officer
Syrus P. Madavi 53 President and Chief Operating Officer
Anthony R. Muller 59 Executive Vice President, Chief Financial Officer and Secretary
Donald E. Bossi, Ph.D. 39 Transmission Group President
Frederick J. Leonberger, Ph.D. 54 Senior Vice President and Chief Technology Officer
Stan Lumish, Ph.D. 45 Optical Layer Group President
Michael C. Phillips 51 Senior Vice President, Business Development and General Counsel
Mark S. Sobey, Ph.D. 42 Senior Vice President, Global Sales and Marketing
Joseph C. Zils 48 Thin Film Products Group President
Jozef Straus has served as our Chief Executive Officer since May 2000 and
Co-Chairman of the Board of Directors since July 1999. Dr. Straus was also our
President from June 2001 to July 2002, and Chief Operating Officer following the
merger of Uniphase Corporation and JDS FITEL Inc. in July 1999. Dr. Straus
co-founded JDS FITEL in 1981 and served as its Chief Executive Officer and
President from September 1993 to July 1999. He served on the JDS FITEL Board of
Directors from 1981 and held various positions with JDS FITEL, including Vice
President, Sales and Marketing from 1990 to 1993 when he assumed the position of
Chief Executive Officer and President. Prior to 1981, Dr. Straus held various
research and management positions related to fiberoptic technology at
Bell-Northern Research Ltd. and Northern Telecom Limited. Dr. Straus is a member
of the Board of Directors of GT Group Telecom.
Donald Scifres became our Chief Strategy Officer in June 2001. Dr. Scifres
joined JDS Uniphase as Co-Chairman of the Board of Directors and President of
the Amplification and Transmission Business Group upon our acquisition of SDL
in February 2001. Dr. Scifres helped found SDL in 1983 and served as Chief
Executive Officer, President and a member of the Board of Directors. In 1992,
Dr. Scifres became Chairman of the Board of SDL. From 1972 to 1983, Dr. Scifres
held positions at the Xerox Palo Alto Research Center including Manager of
Optoelectronics and Xerox Research Fellow. Dr. Scifres is a member of the
National Academy of Engineering and a Fellow of the Institute of Electrical and
Electronic Engineers and the Optical Society of America, holds over 100 U.S.
patents and has won a number of industry awards, including awards for
commercialization of semiconductor optoelectronics and laser technology. Dr.
Scifres has also served as President of the Laser and Electro-Optics
Manufacturers' Association and the IEEE Lasers and Electro-Optics Society.
Syrus P. Madavi was appointed as our President and Chief Operating Officer
in July 2002. Prior to joining JDS Uniphase, Mr. Madavi was Senior Vice
President of High Performance Analog Products at Texas Instruments ("TI"). From
1994 to 2000, Mr. Madavi was Chairman, President and CEO of Burr-Brown
Corporation, a manufacturer of high-performance analog and mixed signal
integrated circuits for markets including high-speed communications applications
which included DWDM, wireless base stations and DSL. Prior to Burr-Brown, Mr.
Madavi's positions have included President of Raytheon Semiconductor, Vice
President and General Manager of Honeywell Signal Processing Technologies, and
marketing management positions at Analog Devices, Inc. Most recently, prior to
joining JDS Uniphase, he served as Executive Chairman of ON Semiconductors, a
manufacturer of data-management and standard semiconductor components.
Anthony R. Muller became our Executive Vice President in May 2000 and has
also served as our Chief Financial Officer and Secretary since January 1998.
From January 1998 until his appointment as Executive Vice President, Mr. Muller
served as Senior Vice President. From September 1984 to January 1998, Mr.
Muller was a member of the Board of Directors. From September 1996 to January
1998, Mr. Muller was Senior Vice President and Chief Financial Officer of Micro
Focus Group Plc, a supplier of software tools. From November 1990 to September
1996, Mr. Muller served as Senior Vice President of Operations and
Administration and Chief Financial Officer of Centigram Communications
Corporation, a supplier of telecommunications systems. Mr. Muller is a member
of the Board of Directors of WebEx Communications. Mr. Muller plans to retire
by the end of the first calendar quarter of 2003 during which he will turn 60.
A-17
Donald E. Bossi has served as our Transmission Group President since April
2002. From September 2001 to March 2002, Dr. Bossi was Active Components Group
President, and from January 1994 to September 2001, Dr. Bossi held various
management positions with JDS Uniphase. Prior to joining JDS Uniphase, Dr. Bossi
held technical leadership positions with United Technologies Research Center and
MIT Lincoln Laboratory.
Frederick J. Leonberger has been our Chief Technology Officer since July
1997 and Senior Vice President since July 1999. Dr. Leonberger was co-founder
and general manager of Uniphase Telecommunications Products, Inc. ("UTP") and
joined JDS Uniphase upon our acquisition of UTP in May 1995. Dr. Leonberger has
been active in optoelectronics for over 25 years and has held a variety of
staff and management positions at MIT Lincoln Laboratory, United Technologies
Research Center, UTP and the Company. Dr. Leonberger is the recipient of
several professional awards and is a member of National Academy of Engineering.
Stan Lumish has served as our Optical Layer Group President since July
2002. Dr. Lumish joined JDS Uniphase in February 2000 as Vice President, Network
Product Applications, and was subsequently appointed Group Vice President, R & D
of the Transmission Subsystems group, and General Manager of the Optical
Networks Research group. Prior to JDS Uniphase, Dr. Lumish held management
positions with Lucent, where he received the Bell Labs Fellow award.
Michael C. Phillips joined JDS Uniphase as Senior Vice President, Business
Development and General Counsel in August 1998. Mr. Phillips was a partner at
Morrison & Foerster LLP, which serves as our outside counsel, from 1988 until
he joined us in August 1998.
Mark S. Sobey has served as our Senior Vice President, Global Sales and
Marketing since May 2002. From January 2001 to May 2002, Dr. Sobey was Vice
President of Sales, North America. Dr. Sobey was Director of Sales, North
America from July 2000 to January 2001, and from December 1999 to June 2000,
Dr. Sobey was Director of Sales, North America with E-TEK. Prior to E-TEK, Dr.
Sobey was Vice President / General Manager with Spectra-Physics.
Joseph C. Zils has served as our Thin Film Products Group President since
March 2000. Prior to our acquisition of OCLI in February 2000, Mr. Zils served
as Vice President, General Counsel and Corporate Secretary of OCLI from December
1993 to March 2000.
Risk Factors
The current economic downturn has significantly harmed and may continue to
significantly harm our customers' and our businesses
Our overall sales are declining, we are not currently profitable, and we have
difficulty predicting future operating results
As a result of current unfavorable economic and market conditions,
particularly in the telecommunications sector, our overall sales are declining,
we are not currently profitable, and we are unable to predict future overall
sales accurately or to provide long-term guidance for future financial
performance. The conditions contributing to this difficulty include:
o uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon whom our telecommunications systems
manufacturer customers, and ultimately we, depend for the majority of our
sales;
o the weakened financial condition of many large telecommunications carriers
and their current limited access to the capital required for expansion;
o our telecommunications systems manufacturer customers continuing to reduce
their inventory levels, which reduces our sales to them;
o limited visibility regarding the long-term demand for high content, high
speed, broadband telecommunications networks;
o excess fiber and channel capacity, particularly in the long-haul market,
which historically has been responsible for a major portion of our sales
and profits; and
o general market and economic uncertainty.
A-18
Based on these and other factors, many of our major telecommunications
systems manufacturer customers have reduced, modified, cancelled or rescheduled
orders for our products and have expressed uncertainty as to their future
requirements. As a result, our net sales in the future may decline further and
we anticipate that we will continue to be unprofitable for near future periods.
In addition, due to our current limited ability to provide long-term guidance
for our operating results, our ability to meet financial expectations for future
periods may be harmed.
Our Global Realignment Program may not be successful in aligning our operations
to current market conditions
In response to the current economic slowdown and as part of our continuing
integration efforts, we commenced a Global Realignment Program in April 2001,
under which we are, among other things:
o eliminating some product development programs and consolidating or
curtailing others in order to focus our research and development
investments on the most promising projects;
o consolidating our manufacturing of several products from multiple sites
into single locations, as well as consolidating sales and administrative
functions; and
o aligning our sales organization to offer customers a single point of
contact for all of their product requirements, and creating regional and
technical centers to streamline customer interaction with product line
managers.
Implementation of the Global Realignment Program involves major reductions
in our workforce and facilities and, in certain instances, the relocation of
products, technologies and personnel. We have incurred and will continue to
incur significant expenses to implement the Global Realignment Program and we
expect to realize significant future cost savings as a result. The Global
Realignment Program may not be successful in achieving these cost savings and
other benefits within the expected timeframes, may be insufficient to
successfully restructure our operations to conform with the changes affecting
our industry, may disrupt our operations, or may be more costly than currently
anticipated. Even if the Global Realignment Program is successful and meets our
current cost reduction goals, our sales must increase substantially in the
future for us to be profitable.
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 and declining demand for our
telecommunications products, we have written down a substantial portion of our
inventory as our sales forecasts continued to decline. As discussed above, our
ability to forecast our customers' needs for our telecommunications products in
the current economic environment is very limited. We have incurred, and may in
the future incur, charges to write down our inventory. We use a rolling
six-month forecast based on anticipated product orders, product order history,
forecasts, and backlog to assess our inventory requirements. In fiscal 2002, we
recorded charges of $203.9 million related to excess and obsolete inventory. We
may incur significant similar inventory write-downs in future periods. Moreover,
because of our current difficulty in forecasting overall sales, we may in the
future revise our previous forecasts, which could lead to further inventory
write-downs. While we believe, based on current information, that the amount
recorded for inventory is properly reflected on our balance sheet at June 30,
2002, if market conditions are less favorable than our forecasts, our future
sales mix differs from our forecasted sales mix, or actual demand from our
customers is lower than our estimates, we may be required to record additional
inventory write-downs.
Our customers' businesses have been harmed by the economic downturn
Our business is largely dependent upon product sales to telecommunications
systems manufacturers who in turn are dependent for their business upon sales of
fiberoptic systems to telecommunications carriers. All of our systems
manufacturer customers and their carrier customers have experienced severe
business declines during the current downturn. Many of these companies are
currently operating at losses and are unable to make meaningful long-term
predictions for their recovery, and hence their forecasted requirements for
optical telecommunications systems. This continuing uncertainty means that, as
suppliers of the components and modules for these systems, our ability to
predict our financial results or business prospects for future periods is
severely limited.
A-19
Any failure of our major telecommunications systems manufacturer customers, or
their telecommunications carrier customers, to service their debt would
materially harm our business
During the rapid growth in the telecommunications sector in the mid-to-late
1990s, telecommunications systems manufacturers and their telecommunications
carrier customers incurred large amounts of debt in order to finance the
expansion that was then forecasted. In the rapid downturn, which followed,
spending and revenue declined, but debt remained and in some instances
increased. As a result, several of the telecommunications carriers and, in turn
their suppliers, our telecommunications systems manufacturer customers, continue
to have significant amounts of outstanding debt. The servicing of this debt may,
among other things, limit the carriers' ability to buy new capital equipment
and, thus, the demand for telecommunications systems. In fact, several carriers
(WorldCom and Global Crossing, among others) have declared bankruptcy over the
last eighteen months, or are otherwise in financial distress. We anticipate that
some or all of these companies will need to repay or restructure significant
portions of their debt in the future. Any failure in this task could materially
harm their, and consequently our, businesses. As long as these companies are
focused on debt concerns, they are less likely to acquire telecommunications
systems.
We face risks associated with our customers' failure to meet their financial
obligations to us
Although we perform ongoing credit evaluations of our customers and manage
and monitor balances owed us, we are not able to predict changes in their
financial condition, particularly during the continuing economic downturn. Based
on our estimates as to the quality of our accounts receivable, we maintain
allowances for doubtful accounts for estimated losses resulting from the
inability or unwillingness of our customers to make required payments. However,
if our customers are unable to meet their financial obligations to us as a
result of bankruptcy or deterioration in their operating results or financial
condition, our trade receivables may not be recoverable and, in addition to not
receiving the amounts owed, we may be required to record additional bad debt
expenses, which could materially affect our operating results.
Moreover, the continuing economic slowdown has exacerbated our
vulnerability to demand fluctuations for our telecommunications products, which
have increased significantly in the current environment. Specifically, we have
experienced and remain vulnerable to material order cancellations, modifications
and reschedulings, all of which, among other things, reduce our sales and impair
our ability to achieve financial targets and predict financial results for
future periods.
We depend on recovery and long-term growth in our markets for our success
If the Internet does not continue to grow as expected, our business will suffer
Our future success as a manufacturer of optical components, modules and
subsystems ultimately depends on the continued growth of the communications
industry, and, in particular, the growth of the Internet as a global
communications system. As part of that growth we are relying on increasing
demand for high-content voice, text and other data delivered over high-speed
connections (i.e., high bandwidth communications). As Internet usage and
bandwidth demand increase, so does the need for advanced optical networks to
provide the required bandwidth. Without Internet and bandwidth growth, the need
for our advanced communications products, and hence our future growth as a
manufacturer of these products, are jeopardized. Currently, while generally
increasing demand for Internet access is apparent, less apparent is the demand
for widespread high bandwidth service. Moreover, multiple service providers
compete to supply the existing demand. Also, currently, fiberoptic networks have
significant excess capacity. The combination of a large number of service
providers and excess network capacity has resulted in severely depressed prices
for bandwidth. Until pricing recovers, service providers have less incentive to
install equipment and, thus, little need for many of our products. Ultimately,
should long-term expectations for Internet growth and bandwidth demand not be
realized, our future business would be significantly harmed.
We depend on stability or growth in the markets for our products outside
communications for growth in the sales of this group of products
The growth of our display products, commercial laser, light interference
pigment and other optical technology businesses, as well as our commercial laser
products, depends significantly on the continued stability or growth and
A-20
success of these markets. Among other things, advances in the technology used in
computer monitors, televisions, conference room projectors and other display
devices have led to increased demand for flat panel displays and projection
displays. We cannot be certain that growth in these markets or our other optical
technology markets will continue. In recent periods sales of these products in
the aggregate have grown, although certain products have shown stable sales or
declines that were considerably less than we experienced in our
telecommunication products. Moreover, we cannot predict the impact of
technological or other changes in these industries on our business. In addition,
each of these industries is subject to pricing pressure, consolidation and
realignment as industry participants react to shifting customer requirements and
overall demand. There is a risk that any consolidation or realignment could
adversely affect our business, and pricing pressure can adversely affect our
operating results.
Our business and financial condition could be harmed by our long-term growth
strategy
If we fail to manage or anticipate our long-term growth, our business will
suffer
Notwithstanding the recent decline, the optical networking business and
thin film coating businesses have historically grown, at times rapidly, and we
have grown accordingly. We have made and, although we remain in an industry
downturn, expect in the future 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 manage or anticipate our future growth effectively, particularly during
periods of industry decline, our business will suffer.
Difficulties associated with integrating our acquired businesses could harm our
overall business operations
Our strategy includes acquisition of other companies, technologies and
product lines to complement our internally developed products. In fact, we are
the product of several significant 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 OCLI
on February 4, 2000, E-TEK on June 30, 2000 and SDL on February 13, 2001. More
recently, we acquired IBM's optical transceiver business on December 28, 2001
and Scion on April 26, 2002. We expect to continue this strategy. Critical to
the success of this strategy and, ultimately, our business as a whole, is the
orderly, efficient, effective integration of acquired businesses into our
organization. If our integration efforts are unsuccessful, our businesses will
suffer. Successful integration depends upon:
o our ability to integrate the manufacture, sale and marketing of the
products of the acquired businesses with our existing products;
o our ability to complete product development programs and consolidate
research and development efforts;
o our ability to retain key personnel of the acquired businesses and
effectively integrate their personnel with our own;
o our ability to realize any expected cost savings and other expected
benefits resulting from acquisitions;
o our ability to consolidate and reorganize operations with those of the
acquired businesses; and
o our ability to expand our information technology systems (including
accounting and financial systems, management controls and procedures).
Our ongoing integration efforts may not be successful and may result in
unanticipated operational problems, expenses and liabilities, as well as the
diversion of management attention.
Our acquisition strategy is costly
Our acquisition strategy is costly. For example, we incurred direct costs
of $12.0 million associated with the combination of Uniphase Corporation and JDS
FITEL, $8.2 million associated with the acquisition of OCLI, $32.3 million
associated with the acquisition of E-TEK, $44.6 million associated with the
acquisition of SDL and $6.3 million associated with the acquisition of IBM's
optical transceiver business. In addition, we paid certain SDL
A-21
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 costs associated with these or other combinations and acquisitions.
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, lower
the value of our common stock and weaken our financial condition.
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. New product
development activities are expensive, with no guarantee of success. Risks
associated with our development of new products and improvements to existing
products include the risk that:
o we may fail to complete the development of a new or improved product; or
o our customers may not purchase the new 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 effort to support anticipated increased levels of
operations. We may not be successful in creating this infrastructure, or we may
not realize sufficiently increased sales 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.
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 intangible assets
Under GAAP, we accounted for most of our acquisitions using the purchase
method of accounting. Under purchase accounting, we recorded: (i) the market
value of our common shares and the exchangeable shares of our subsidiary, JDS
Uniphase Canada Ltd., issued in connection with acquisitions, (ii) the fair
value of the stock options assumed, if any, and (iii) the amount of direct
transaction costs as the cost of the acquisitions. The total purchase cost was
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. We were carrying a large amount of goodwill on our balance sheets
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.
The impact of purchase accounting on our operating results is significant.
During fiscal 2002, 2001 and 2000, we recorded $1,308.7 million, $5,387.0
million and $896.9 million, respectively, of amortization of goodwill and other
intangible assets.
Beginning in the second half of fiscal 2001 and through the end of fiscal
2002, we evaluated the carrying value of our long-lived assets, including our
goodwill and other intangible assets. The assessment was performed pursuant to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," because of the significant negative
industry and economic trends affecting our operations and expected future sales.
As we determined that the continued decline in market conditions within our
industry was significant and prolonged, we recorded reductions of $5,603.9
million and $50,074.8 million in goodwill and other intangible assets in fiscal
2002
A-22
and 2001, respectively. If the economic downturn continues for longer than
expected, it is possible that our operating results would be adversely affected
by additional write-downs of our goodwill and other intangible assets.
As discussed further below, goodwill is no longer amortized beginning July
1, 2002. Instead, it will be reviewed for impairment under a two-step process,
which will be completed at least annually.
Our financial results could be affected by changes in accounting rules
Implementation of SFAS No. 141 and SFAS No. 142 could affect our operating
results
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Upon adoption of SFAS No. 142 on July 1, 2002, we no longer
amortize our goodwill. Instead, goodwill will be reviewed for impairment under a
two-step process annually, or more frequently if certain events or changes in
circumstances indicate that the carrying value of the goodwill may not be
recoverable (please refer to "Recent Accounting Pronouncements" of Note 1 of
Notes to Consolidated Financial Statements under Item 8 of this Annual Report
for further discussion). As of June 30, 2002, the carrying amount of goodwill
was $332.2 million. In addition, we had approximately $10.8 million of
separately recognized intangible assets, consisting of acquired assembled
workforce, that were reclassified to goodwill on July 1, 2002 because they do
not meet the criteria for an intangible asset under SFAS No. 141. If economic
conditions in our industry continue to deteriorate and adversely affect our
business and revenue forecasts, we could be required to record additional
impairment charges related to goodwill, which could have a material adverse
effect on our results of operations.
Write-downs of long-lived assets, including as the result of the implementation
of SFAS No. 144, could affect our financial results
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (see "Recent Accounting
Pronouncements" of Note 1 of Notes to Consolidated Financial Statements under
Item 8 of this Annual Report for further discussion). SFAS No. 144 requires us
to perform impairment analysis on our long-lived assets to be held and used
(other than goodwill) whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. An impairment loss will be recognized if
the carrying amount of a long-lived asset exceeds its fair value. SFAS No. 144
retains the fundamental provisions of SFAS No. 121 related to (i) the
recognition and measurement of the impairment of long-lived assets to be held
and used, and (ii) the measurement of long-lived assets to be disposed of by
sale. As SFAS No. 144 excludes goodwill, certain long-lived assets may be
subject to impairment charges sooner than they would have been recorded under
SFAS No. 121. Therefore, if economic conditions in our industry continue to
deteriorate and adversely affect our business, we could be required to record
additional impairment charges related to our long-lived assets, which could have
a material adverse effect on our results of operations and financial condition.
Our financial results could be affected by potential changes in the accounting
rules governing the recognition of stock-based compensation expense
We measure compensation expense for our employee stock compensation plans
under the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In
addition, we provide pro forma disclosures of our operating results in our Notes
to Consolidated Financial Statements as if the fair value method of accounting
had been applied in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." Had we accounted for our compensation expense under the fair
value method of accounting prescribed by SFAS No. 123, the charges would have
been significant, totaling $564.0 million, $513.6 million and $246.5 million
during fiscal 2002, 2001 and 2000, respectively. Currently, the U.S. Congress,
the Securities and Exchange Commission and the Financial Accounting Standards
Board are considering changes to accounting rules concerning the recognition of
stock option compensation expense. If one or more of these proposals are
implemented, we and other companies may be required to measure compensation
expense using the fair value method, which would adversely affect our results of
operations by reducing our income or increasing our losses by an amount equal to
such stock option charges.
A-23
Our sales are dependent upon a few key customers
A few large customers account for most of our sales. During fiscal 2000,
Lucent and Nortel accounted for 21% and 15% of our net sales, respectively.
During fiscal 2001, Nortel, Alcatel and Lucent accounted for 14%, 12% and 10% of
our net sales, respectively. During fiscal 2002, no customer accounted for more
than 10% of our net sales. However, we expect that, for the foreseeable future,
sales to a limited number of customers will continue to account, alone or in the
aggregate, for a high percentage of our net sales. Many of our customers are
currently experiencing significant revenue declines and, in recent periods, have
significantly reduced their orders to us. If such reductions continue our
business will continue to be harmed.
Any failure to remain competitive would harm our operating results
If we are not competitive, our operating results could suffer
The 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 research and
development, improve the efficiency of our manufacturing operations, and
streamline our marketing and sales efforts, as well as customer service and
support. Under our Global Realignment Program, we have ongoing initiatives in
each of these areas. However, our efforts to remain competitive as we continue
to implement our Global Realignment Program 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, manufacturing efficiencies or development efforts by our
competitors may render our products or technologies obsolete or uncompetitive.
In the telecommunications industry, our telecommunications systems
manufacturer customers evaluate our products and competitive products for
deployment in their telecommunications systems. Similarly, their
telecommunications carrier customers evaluate our customers' system products and
competitive products for system installation. Any failure of us to be selected
by our customers, or our customers to be selected by their customers, for a
systems project, can significantly harm our business.
Our other optical technology businesses are also susceptible to changing
technologies and competition. Growth in the demand for our products within these
markets will depend upon our ability to compete with providers of lower cost,
higher performance products by developing more cost-effective processes and
improving our products. In the security market, we face competition from
alternative anti-counterfeiting devices such as holograms, embedded threads and
watermarks.
The telecommunications industry is consolidating
The telecommunications 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 a result of the current industry downturn. We believe that
industry consolidation may result in stronger competitors who are better able to
compete as sole-source vendors for customers. This could harm our business as we
compete to be a single vendor solution.
We also expect consolidation to occur among our telecommunications system
manufacturer customers and among their telecommunications carrier customers.
Consolidation at either level could result in, among other things, greater
negotiating power for the consolidated companies with their suppliers in
response to reduced competition, and reduced overall demand for
telecommunications systems as the number of companies installing systems or
A-24
providing services declines. Any of these results could reduce demand for our
telecommunications products and increase pressure to reduce our prices and
provide other concessions.
Fiberoptic component average selling prices are declining
Prices for telecommunications fiberoptic 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 suppliers to
reduce costs, leading to increasing pricing pressure on our competitors and us.
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 resolved in subsequent periods, we anticipate
continuing pricing pressure. Moreover, currently, fiberoptic 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 pressure to reduce our prices. Also, numerous
telecommunications carriers (WorldCom and Global Crossing, among others) have
declared bankruptcy over the last 18 months, or are otherwise in financial
distress. As carriers are eliminated from the marketplace, through bankruptcy or
consolidation, system vendors lose customers, while remaining carriers are able
to increase price pressures on system vendors since vendors have fewer customer
alternatives. System vendors in turn will apply those pressures on us.
In response to pricing pressure, we must continue to (i) timely develop and
introduce new products that incorporate features that can cause such products to
be less price sensitive, (ii) increase the efficiency of our manufacturing
operations, and (iii) generally reduce costs. Failure to do so could cause our
net sales and profit 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 and other technical people. Competition for
highly skilled technical people 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
executive officers. 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.
As a consequence of the current economic downturn and as part of our Global
Realignment Program, we have reduced our global workforce to 9,222 employees as
of June 30, 2002. To date, we have not lost the services of any personnel
(either through the announced reduction or otherwise) that have had, or which we
expect will have, a material adverse effect on our business or financial
condition. However, we cannot predict the impact our recent workforce reductions
and any reductions we are compelled to make in the future will have on our
ability to attract and retain key personnel in the future.
We have concerns regarding the manufacturing, quality and distribution of our
products
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 inadvertent use of defective or contaminated
materials by our suppliers or us, could significantly hurt our ability to meet
our customers' product volume and quality needs. Moreover, in some cases,
existing manufacturing
A-25
techniques, which involve substantial manual labor, may not achieve the volume
or cost targets necessary to be competitive. 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 (i) develop advanced
manufacturing techniques to improve product volumes and yields and reduce costs,
and (ii) 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 lines for the
products. Each new manufacturing line must go through rigorous qualification
with our customers. The qualification process can be lengthy and is expensive,
with no guarantee that any particular product qualification process will lead to
profitable product sales. Moreover, under our Global Realignment Program we are
consolidating our worldwide manufacturing operations into centralized locations,
such as our facilities in Shenzhen, China. Among other things, we are moving the
manufacturing of some of our products to other facilities. The manufacturing
lines for these products at the consolidated facilities must undergo
qualification before commercial shipment 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. We
may experience delays in obtaining 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 manufacturing excellent products of consistently
high quality. To this end, our products are rigorously tested for quality both
by our customers and us. 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 that are unforeseeable in testing
or that are detected only when products are fully deployed and operated under
peak stress conditions), 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 product failure could result in lost future sales of the affected
product and other products, as well as customer relations' problems, litigation
and damage to our reputation.
Certain of our non-telecommunications products are subject to governmental and
industry regulations, certifications and approvals
The commercialization of certain of our non-telecommunications products may
be delayed or made more costly due to required government and industry approval
processes. Development of applications for our light interference pigment
products may require significant testing that could delay our sales. For
example, certain uses in cosmetics may be regulated by the Food and Drug
Administration, which has extensive and lengthy approval processes. Durability
testing by the automobile industry of our pigments used with automotive paints
can take up to three years. If we change a product for any reason including
technological changes or changes in the manufacturing process, prior approvals
or certifications may be invalid and we may need to go through the approval
process again. If we are unable to obtain these or other government or industry
certifications in a timely manner, or at all, our operating results could be
adversely affected.
A-26
We may not be able to enter into necessary strategic alliances to effectively
commercialize our products
We often rely on strategic alliances with other companies to commercialize
some of our products in a timely or effective manner, primarily in our
non-telecommunication businesses. Our current strategic alliance partners
provide us with assistance in the marketing, sales and distribution of a diverse
line of products. We may be unable to find appropriate strategic alliances in
markets in which we have little experience, which could prevent us from bringing
our products to market in a timely manner, or at all. For instance, we have a
strategic alliance with SICPA for the marketing and sale of our light
interference pigments used to provide security features in currency, stamps,
credit cards, passports and other specified value documents. Under a license and
supply agreement, we rely exclusively on SICPA to market and sell to these
markets worldwide. We currently do not plan to develop our own marketing and
sales organization for our light interference pigments for use in connection
with such value documents. SICPA has the right to terminate the agreement if we
breach it. If SICPA terminates our agreement or if it is unable to market and
sell our light interference pigments successfully for the applications covered
by the agreement, our business may be harmed and we may be unable to find a
substitute marketing and sales partner or develop these capabilities ourselves.
Also, if SICPA fails to meet its minimum purchase requirements under the
agreement for any reason, our operating results would be adversely affected.
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 price increases 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 and acquire our pump
diodes 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, Fujikura, Philips Key Modules and Sumitomo,
respectively. These materials are important components of certain of our
products and we currently do not have alternative sources for such materials.
Also, 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 at reasonable
prices in the quantities required by us, if at all, in which case our business
could be materially harmed.
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 Asia, Europe and Australia.
Our international presence exposes us to certain risks, including the
following:
o 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;
o tariffs and other trade barriers;
o political, legal and economic instability in foreign markets, particularly
in those markets in which we maintain manufacturing and research
facilities;
o difficulties in staffing and management;
o language and cultural barriers;
o seasonal reductions in business activities in the countries where our
international customers are located;
o integration of foreign operations;
o longer payment cycles;
o greater difficulty in accounts receivable collection;
o currency fluctuations; and
o potentially adverse tax consequences.
A-27
Net sales to customers outside North America accounted for 26%, 32% and 23%
of our total net sales in fiscal 2002, 2001 and 2000, respectively. We expect
that sales to customers outside of North America will continue to account for a
significant portion of our total net sales. Lower sales levels that typically
occur during the summer months in Europe and some other overseas markets may
materially and adversely affect our business. In addition, 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.
The international dimensions of our operations and sales subject us to a
myriad of domestic and foreign trade regulatory requirements. As part of our
ongoing integration program, we are evaluating our current trade compliance
practices and implementing improvements, where necessary. Among other things, we
are auditing our product export classification and customs procedures and are
installing trade information and compliance systems using our global enterprise
software platforms. We do not currently expect the costs of such evaluation or
the implementation of any resulting improvements to have a material adverse
effect on our finances or business, but our evaluation and related
implementation are not yet complete and, accordingly, the costs could be greater
than expected and such costs and the legal consequences of any failure to comply
with applicable regulations could affect our business and results of operations.
We have increasing manufacturing operations in China, which exposes us to risks
inherent in doing business in China
We have significant and increasing operations in China and those operations
are subject to greater political, legal and economic risks than those faced by
our other operations. In particular, the political, legal and economic climate
in China (both at national and regional levels) 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. Our
ability to operate in China may be adversely affected by changes in China's laws
and regulations, such as those relating to taxation, import and export tariffs,
environmental regulations, land use rights, intellectual property and other
matters. 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
changes to the political, legal or economic climate, laws, or practices in China
or the inability to enforce applicable Chinese laws and regulations.
Currently, we operate manufacturing facilities located in Shenzhen, Fuzhou
and Beijing, China. As part of our Global Realignment Program we continue to
increase the scope and extent of our manufacturing operations in our Shenzhen
facility. Accordingly, we expect that our ability to operate successfully in
China will become increasingly important to our overall success.
Currently, we expect to export the majority of the products manufactured at
our facilities in China. Accordingly, upon application to and approval by the
relevant government authorities, we will not be subject to certain of China's
taxes and are exempt from customs duties on imported components or materials and
exported products. We are required to pay income taxes in China, subject to
certain tax relief. We may become subject to other taxes in China or may be
required to pay customs duties in the future. In the event that we are required
to pay other taxes in China or customs duties, our results of operations could
be materially and adversely affected.
Our business could be adversely affected by certain unexpected catastrophic
events
We may encounter natural disasters, which could harm our financial condition
and results of operations
Our corporate headquarters, including some of our research and development
and manufacturing facilities, are located in California near major earthquake
faults. Any damage to our facilities in California or other locations as a
result of an earthquake, fire, or any other natural disasters could disrupt our
operations and have a material adverse impact on our business, operating results
and financial condition.
A-28
Our business is subject to the risks of terrorist acts and acts of war
Terrorist acts or acts of war may disrupt our operations, as well as our
customers' operations. The recent terrorist attacks on September 11, 2001 have
created many economic and political uncertainties, and intensified the global
economic downturn that we are currently facing. Any future terrorist activities
or any continued military or security operations could further weaken the global
economy and create additional uncertainties, forcing our customers to further
reduce their capital spending or cancel orders from us, which could have a
material adverse impact on our business, operating results and financial
condition.
Our business and operations would suffer in the event of a failure of our
information technology infrastructure
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 changing needs. We are constantly
updating our 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 recently unified most of our
manufacturing, accounting, sales and human resource data systems using an Oracle
platform, and we have entered into an agreement for Oracle to provide and
maintain our global ERP infrastructure, on an outsourced basis. Any failure to
manage, expand and update our information technology infrastructure or any
failures in the operation of this infrastructure could harm our business.
Despite our implementation of security measures, our systems are vulnerable
to damages from computer viruses, natural disasters, unauthorized access and
other similar disruptions. Any system failure, accident or security breach could
result in disruptions to our operations. To the extent that any disruptions or
security breach results in a loss or damage to our data, or inappropriate
disclosure of confidential information, it could harm our business. In addition,
we may be required to spend additional costs and other resources to protect us
against damages caused by these disruptions or security breaches in the future.
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. Some of these patents may purport
to cover our products. In response, we may seek to acquire license rights to
these or other patents or other intellectual property to the extent necessary to
ensure we possess sufficient intellectual property rights for the conduct of 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, impede the sale of some of our current products, or
substantially increase the cost to provide these products to our customers.
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 our
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.
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 received 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-
A-29
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 currently have pending various claims from third parties that one
or more of our products or operations infringe or misappropriate their
intellectual property rights or that one or more of our patents is invalid.
Based on information currently available to us, 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.
We face certain litigation risks that could harm our business
We have had numerous lawsuits filed against us asserting various claims,
including several securities class actions and stockholder derivative actions.
The results of complex legal proceedings are difficult to predict. Moreover,
many of the complaints filed against us do not specify the amount of damages
that plaintiffs seek and we therefore are unable to estimate the possible range
of damages that might be incurred should these lawsuits be resolved against us.
While we are unable to estimate the potential damages arising from such
lawsuits, certain of them assert types of claims that, if resolved against us,
could give rise to substantial damages. Thus, an unfavorable outcome or
settlement of one or more of these lawsuits could have a material adverse effect
on our financial position, liquidity or results of operations. Even if these
lawsuits are not resolved against us, the uncertainty and expense associated
with unresolved lawsuits could seriously harm our business, financial condition
and reputation. Litigation can be costly, time-consuming and disruptive to
normal business operations. The costs of defending these lawsuits, particularly
the securities class actions and stockholder derivative actions, could be quite
significant and may not be covered by our insurance policies. The defense of
these lawsuits could also result in continued diversion of our management's time
and attention away from business operations, which could harm our business.
We may have difficulty obtaining director and officer liability insurance in
acceptable amounts for acceptable rates
Like most other public companies, we carry insurance protecting our
officers and directors and us against claims relating to the conduct of our
business. This insurance covers, among other things, the costs incurred by
companies and their management to defend against and resolve claims relating to
management conduct and results of operations, such as securities class action
claims. These claims typically are extremely expensive to defend against and
resolve. Hence, as is customary, we purchase and maintain insurance to cover
some of these costs. We pay significant premiums to acquire and maintain this
insurance, which is provided by third-party insurers, and we agree to underwrite
a portion of such exposures under the terms of these insurance coverage. Over
the last several years, the premiums we have paid for this insurance have
increased substantially. One consequence of the current economic downturn and
decline in stock prices has been a substantial general increase in the number of
securities class actions and similar claims brought against public corporations
and their management, including our company and certain of our current and
former officers and directors. Many, if not all, of these actions and claims
are, and will likely continue to be, at least partially insured by third-party
insurers. Consequently, insurers providing director and officer liability
insurance have in recent periods sharply increased the premiums they charge for
this insurance,
A-30
raised retentions (that is, the amount of liability that a company is required
to itself pay to defend and resolve a claim before any applicable insurance is
provided), and limited the amount of insurance they will provide. Moreover,
insurers typically provide only one-year policies. We are currently negotiating
with insurer groups to renew our director and officer insurance. Next year, and
each year thereafter, we will be required to do the same. Particularly in the
current economic environment, we cannot assure that we will be able to obtain
sufficient director and officer liability insurance coverage at acceptable rates
and with acceptable deductibles and other limitations. Failure to obtain such
insurance could materially harm our financial condition in the event that we are
required to defend against and resolve any future securities class actions or
other claims made against us or our management arising from the conduct of our
operations. Further, the inability to obtain such insurance in adequate amounts
may impair our future ability to retain and recruit qualified officers and
directors.
If we fail to manage our exposure to worldwide financial and securities markets
successfully, 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 most 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. When we acquire assets denominated in foreign
currencies, we usually mitigate currency risks associated with these exposures
with forward currency contracts. The change in a derivative's 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, some
of these activities are conducted 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.
We also hold investments in other public and private companies, including,
among others, Nortel, Adept Technologies and ADVA, and have limited funds
invested in private venture funds. We acquired the ADVA and Nortel investments
prior to the economic downturn, when the market prices of both companies' stocks
were significantly higher than at present. All three companies have experienced
severe stock price declines during the economic downturn, which, in the case of
Nortel and ADVA, have greatly reduced the value of our investments, and we have
written down the value of these investments accordingly. During fiscal 2002, we
recorded impairment charges of $187.3 million related to Nortel and $13.9
million related to ADVA. During fiscal 2001, we recorded impairment charges of
$511.8 million related to Nortel and $744.7 million related to ADVA. We do not
currently believe the value of our investment in Adept has been impaired.
However, depending on economic and market conditions, its value may decline in
the future. In addition to our public company investments, we have in the past
and expect to continue to make investments in private companies for strategic
and commercial purposes. In recent months several of the private companies in
which we held investments have ceased doing business and have either liquidated
or are in bankruptcy proceedings. If the carrying value of our investments
exceeds the fair value and the decline in fair value is deemed to be
other-than-temporary, we will be required to write down the value of the
investments, which could materially harm our results of operations or financial
condition.
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 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 our markets. We
cannot precisely determine the timing and amount of such capital requirements,
which will depend on several factors, including, among others, our acquisitions,
the success of our
A-31
Global Realignment Program 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 rights plan and our ability to issue additional preferred stock could harm
the rights of our common stockholders
In June 1998, we adopted a Stockholder Rights Agreement, as amended and
declared a dividend distribution of one right per share of common stock for
stockholders of record as of July 6, 1998. As adjusted for stock splits and
dividends by us, each outstanding share of our common stock currently includes
one-eighth of a right. Each right entitles stockholders to purchase 1/1000 share
of our 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 acquisition of or tender offers for 15% or
more of our common stock. For a limited period of time following the
announcement of any such acquisition or offer, the rights are redeemable by us
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 our Board of
Directors, may be exchanged for either 1/1000 share of Series B Preferred Stock
or one share of common stock per right. The rights expire on June 22, 2008.
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 Series B Preferred Stock or any preferred stock
subsequently issued by our Board of Directors, under some circumstances, could
have the effect of delaying, deferring or preventing a change in control.
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
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.
A-32
ITEM 2. PROPERTIES
Our principal offices are located in San Jose, California, United States
and Ottawa, Ontario, Canada. The table below summarizes the properties that we
owned and leased as of June 30, 2002:
Leased Properties:
- ------------------
Location Square footage Location Square footage
- -------- -------------- -------- --------------
NORTH AMERICA: EUROPE:
- -------------- -------
Canada: France:
Ottawa 473,938 Grenoble 3,800
Toronto 25,712 Meylan 10,226
United States: Germany:
Asbury, NJ 5,467 Eching 8,712
Billerica, MA 36,445 Waghaeusel-Kirrlach 55,000
Bloomfield, CT 93,750 Netherlands:
Eatontown, NJ 84,000 Eindhoven 134,984
Ewing Township, NJ 132,300 United Kingdom:
Freehold, NJ 15,965 Bracknell 39,000
Horsham, PA 126,500 Luton 3,000
Huntsville, AL 2,046 Oxford 63,550
Manteca, CA 20,500 Torquay 33,000
Melbourne, FL 109,000
Milpitas, CA 69,702 REST OF WORLD:
Morrisville, NC 4,995 --------------
Mountain Lakes, NJ 20,000 Australia:
Nashua, NH 2,611 Sydney 102,030
Norwood, MA 20,800 China:
Parsippany, NJ 14,600 Beijing 75,347
Piscataway, NJ 132,650 Fuzhou 446,366
Raleigh, NC 181,790 Hong Kong 2,914
Richardson, TX 23,400 Shenzhen 344,456
San Jose, CA 396,922 Japan:
Santa Clara, CA 148,494 Atsugi 9,200
Santa Rosa, CA 71,339 Tokyo 859
Valencia, CA 23,191
Windsor, CT 165,000 ---------
Total leased square footage: 3,733,561
Owned Properties:
- -----------------
Location Square footage Location Square footage
- -------- -------------- -------- --------------
NORTH AMERICA: EUROPE:
- -------------- -------
Canada: United Kingdom:
Ottawa 968,235 Hillend 56,834
United States: Kent 5,210
Bloomfield, CT 24,000 Plymouth 114,473
Columbus, OH 107,000
Melbourne, FL 90,660 REST OF WORLD:
San Jose, CA 348,000 --------------
Santa Rosa, CA 638,117 China:
West Trenton, NJ 68,361 Fuzhou 84,163
Taiwan:
Taipei 231,166
---------
Total owned square footage: 2,736,219
---------
Total leased and owned square footage: 6,469,780
=========
A-33
As part of our Global Realignment Program, we have completed and approved
restructuring plans to close sites, vacate buildings at closed sites as well as
at continuing operations and consolidate excess facilities worldwide. Of the
total leased and owned square footage as of June 30, 2002, approximately 2.5
million square feet were related to properties included in our Global
Realignment Program.
ITEM 3. LEGAL PROCEEDINGS
The Securities Class Actions:
- -----------------------------
Beginning on March 27, 2002, twenty-six securities class actions were filed
in the United States District Court for the Northern District of California
against us and several of our current and former officers and directors by
stockholders purporting to represent a class of purchasers of our common stock
during the period from July 27, 1999 through July 26, 2001. Some of these
lawsuits also named one of our stockholders as a defendant. On April 23, 2002, a
similar lawsuit was filed in the District Court for the Southern District of New
York. That lawsuit also named our independent auditors, Ernst & Young LLP, as a
defendant. It was transferred to the Northern District of California on June 25,
2002.
The lawsuits described above seek unspecified damages and allege various
violations of the federal securities laws, specifically Sections 10(b), 14(a)
and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the
Securities Act of 1933. On July 26, 2002, the Northern District of California
consolidated all the actions under the title In re JDS Uniphase Corporation
Securities Litigation, Master File No. C-02-1486 CW, and appointed the
Connecticut Retirement Plans and Trust Funds as Lead Plaintiff. A consolidated
complaint is due to be filed on October 7, 2002. No trial date has been set.
On July 26, 2002, a securities class action captioned Zelman v. JDS
Uniphase Corp., Civil Action No. 02-CV-6002, was filed in the District Court for
the Southern District of New York. The complaint, brought by a stockholder
purporting to represent a class of purchasers of certain GOALS debt securities
issued by an investment bank during the period from March 6, 2001 through
September 26, 2001, named us, one of our stockholders, and several of our
current and former officers and directors as defendants and alleges violations
of the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5. The parties have stipulated to
transfer the action to the District Court for the Northern District of
California. No trial date has been set.
The Derivative Actions:
- -----------------------
Ten derivative actions purporting to be brought on our behalf have been
filed in state and federal courts against several of our current and former
officers and directors. Some of these actions also named our independent
auditors, Ernst & Young LLP, as a defendant. All were based on the same factual
allegations and circumstances as the purported securities class actions and
alleged state law claims for breach of fiduciary duty, misappropriation of
confidential information, waste of corporate assets, contribution and
indemnification, insider trading, abuse of control, gross mismanagement and
unjust enrichment. These actions seek unspecified damages and no trial date has
been scheduled in any of these actions. These ten actions included: Coykendall
v. Kaplan, CV 806911, filed on April 11, 2002 in California Superior Court for
the County of Santa Clara; Plotkin v. Kaplan, CV 807496, filed on May 1, 2002 in
the same court; Wright v. Straus, CV 807799, filed on May 13, 2002 in the same
court; Schienberg v. Straus, CV810211, filed on August 9, 2002 in the same
court; Bogosian v. Straus, CIV 422822, filed on May 16, 2002 in California
Superior Court for the County of San Mateo; Abo v. Kaplan, CIV 423693, filed on
June 19, 2002 in the same court; Williams v. Ernst & Young, CIV 425385, filed on
September 3, 2002 in the same court; Cromas v. Straus, Civil Action No. 19580,
filed on April 25, 2002 in the Delaware Court of Chancery for New Castle County;
Corwin v. Kaplan, Civil Action No. C-02-2020-VRW, filed on April 24, 2002 in the
District Court for the Northern District of California; and Shalom v. Kaplan
C-02-2989 SC ARB, filed on June 21, 2002 in the same court.
On August 1, 2002, the District Court for the Northern District of
California issued an order to show cause regarding the Court's jurisdiction over
the federal court actions (Corwin and Shalom). In response, the plaintiffs in
those actions filed amended complaints that no longer named Mr. Casimir S.
Skrzypczak, a member of our Board of Directors, as a defendant. Plaintiffs have
asserted that the omission of Mr. Skrzypczak permits the Court to exercise
diversity jurisdiction over the complaints, and the Court has not yet ruled on
the issue. A petition to
A-34
coordinate the state court actions (Coykendall, Wright, Plotkin, Schienberg,
Bogosian, Abo and Williams) was filed on September 5, 2002. No trial date has
been set in either the state or federal court actions.
We believe that the factual allegations and circumstances underlying these
securities class actions and derivative actions are without merit. The
litigation could prove to be costly and time consuming, however, and there can
be no assurance that we will prevail. An unfavorable outcome of this litigation
could have a material adverse effect on our financial position or results of
operations.
We are a party to other litigation matters and claims, which are normal in
the course of our operations. While the results of such litigation matters and
claims cannot be predicted with certainty, we believe that their final outcome
will not have a material adverse impact on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
A-35
PART II
ITEM.5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"JDSU" and our exchangeable shares of JDS Uniphase Canada Ltd. are traded on The
Toronto Stock Exchange under the symbol "JDU." Holders of exchangeable shares
may tender their holdings for common stock on a one-for-one basis at any time.
As of August 16, 2002, we had 1,414,097,002 shares of common stock outstanding,
including 153,536,601 exchangeable shares. The closing price on August 16, 2002
was $2.31 for the common stock and Canadian $3.97 for the exchangeable shares.
The following table summarizes the high and low closing sales prices for our
common stock as reported on the Nasdaq National Market in each quarter during
fiscal 2002 and 2001:
High Low
---------- ----------
Fiscal 2002:
Fourth quarter $ 6.14 $ 2.28
Third quarter 10.02 4.85
Second quarter 12.26 6.26
First quarter 12.96 5.35
Fiscal 2001:
Fourth quarter $ 28.53 $ 10.00
Third quarter 63.88 17.50
Second quarter 102.37 40.94
First quarter 135.94 94.69
As of August 16, 2002, we had 7,753 holders of record of our common stock
and exchangeable shares. We have not paid cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
Issuance of Unregistered Securities:
- ------------------------------------
During the fourth quarter of fiscal 2002, we issued 1.0 million shares of
our common stock in connection with our acquisition of Optical Process
Automation Corp. These shares were issued as a result of certain milestones
achieved as part of the 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.
During the fourth quarter of fiscal 2002, we issued 6.6 million shares of
our common stock in connection with our acquisition of Epion Corporation. These
shares were issued as a result of certain milestones achieved as part of the
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.
On July 1, 2002, we issued 39.2 million shares of our common stock to
Koninklijke Philips Electronics N.V. ("Philips"). These shares were issued as a
result of certain milestones achieved by UNL, a subsidiary we acquired from
Philips during fiscal 1998 (please refer to "Note 6. Stockholders' Equity" of
the Notes to Consolidated Financial Statements under Item 8 of this Annual
Report for further discussion). The issuance of the common stock was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
A-36
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data for each of the last 5
fiscal years (in millions, except per-share data):
Years Ended June 30,
--------------------------------------------------------------
2002 (1) 2001 (2)(3) 2000 (4) 1999 1998
--------- ---------- -------- ------- ------
Consolidated Statement of Operations Data:
Net sales $ 1,098.2 $ 3,232.8 $1,430.4 $ 282.8 $185.2
Amortization of purchased intangibles 1,308.7 5,387.0 896.9 15.7 5.6
Acquired in-process research and development 25.3 393.2 360.7 210.4 40.3
Reduction of goodwill and other long-lived assets 5,979.4 50,085.0 -- -- --
Restructuring charges 260.0 264.3 -- -- --
Merger and other costs (7) -- -- -- 6.8 --
Loss from operations (8,284.0) (56,347.4) (865.1) (153.2) (11.5)
Net loss (8,738.3) (56,121.9) (904.7) (171.1) (19.6)
Net loss per share -- basic and diluted $ (6.50) $ (51.40) $ (1.27) $ (0.54) $(0.07)
June 30,
-------------------------------------------------------------
2002 (1) 2001 (2)(3) 2000 (4)(5) 1999 (6) 1998
------- ---------- ---------- ------- ----
Consolidated Balance Sheet Data:
Working capital $1,374.8 $ 2,187.8 $ 1,325.7 $ 314.8 $121.4
Total assets 3,004.5 12,245.4 26,389.1 4,096.1 332.9
Long-term obligations 8.9 18.0 61.2 9.8 5.7
Total stockholders' equity 2,471.4 10,706.5 24,778.6 3,619.3 280.0
- ------------
(1) We acquired IBM's optical transceiver business on December 28, 2001 in a
transaction accounted for as a purchase. The Consolidated Statement of
Operations for fiscal 2002 included the results of operations of the optical
transceiver business subsequent to December 28, 2001 and the Consolidated
Balance Sheet as of June 30, 2002 included the financial position of the
optical transceiver business.
(2) We acquired SDL on February 13, 2001 in a transaction accounted for as a
purchase. The Consolidated Statement of Operations for fiscal 2001 included
the results of operations of SDL subsequent to February 13, 2001 and the
Consolidated Balance Sheet as of June 30, 2001 included the financial
position of SDL.
(3) On February 13, 2001, we completed the sale of our Zurich, Switzerland
subsidiary to 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 from the transaction. We subsequently sold 41.0 million
shares of Nortel common stock for total proceeds of $659.2 million,
resulting in a realized loss of $559.1 million during fiscal 2001.
(4) We acquired OCLI on February 4, 2000 in a transaction accounted for as a
purchase. The Consolidated Statement of Operations for fiscal 2000 included
the results of operations of OCLI subsequent to February 4, 2000 and the
Consolidated Balance Sheet as of June 30, 2000 included the financial
position of OCLI.
(5) We acquired E-TEK on June 30, 2000 in a transaction accounted for as a
purchase. The Consolidated Balance Sheet as of June 30, 2000 included the
financial position of E-TEK.
(6) Uniphase Corporation merged with JDS FITEL to form JDS Uniphase Corporation
on June 30, 1999 in a transaction that was accounted for as a purchase. The
Consolidated Balance Sheet as of June 30, 1999 included the financial
position of JDS FITEL.
(7) Merger and other costs in fiscal 1999 consisted of $5.9 million of costs and
expenses attributable to the pooling of interests transaction with Uniphase
Broadband Products and a $0.9 million loss on sale of the Ultrapointe
Systems assets.
A-37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Adjustments to Previously Announced FY 2002 Fourth-Quarter and Annual Results
On July 25, 2002, we issued a press release announcing our fourth-quarter
and annual results for the year ended June 30, 2002. In the press release, we
reported reductions of goodwill and other long-lived assets of $5,933.5 million
in the Condensed Consolidated Statement of Operations for the year ended June
30, 2002. Subsequent to July 25, 2002, we received additional information that
caused us to reevaluate these reductions. As a result of this reevaluation, we
recorded additional reductions of $45.9 million in the carrying amount of
property, plant and equipment as of June 30, 2002. In this Annual Report, we
report reductions of goodwill and other long-lived assets of $5,979.4 million in
the Consolidated Statement of Operations for the year ended June 30, 2002.
The following table presents a reconciliation of the net loss and net loss
per share reported in our press release on July 25, 2002 to the amounts reported
in this Annual Report (in millions, except per-share data):
Three Months Ended Year Ended
June 30, 2002 June 30, 2002
------------------ -------------
Net loss announced on July 25, 2002 $ (996.6) $(8,692.4)
Adjustment:
Additional reductions of goodwill and other long-lived assets --
property, plant and equipment (45.9) (45.9)
--------- ---------
Reported net loss in Annual Report $(1,042.5) $(8,738.3)
========= =========
Net loss per share announced on July 25, 2002 --
basic and diluted $ (0.73) $ (6.47)
========= =========
Reported net loss per share in Annual Report --
basic and diluted $ (0.76) $ (6.50)
========= =========
Industry Environment
During the second half of the 1990's through 2000, the telecommunications
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:
o the introduction of wavelength division multiplexing ("WDM") technology,
under which multiple light signals are transmitted down a single optical
fiber cable. WDM allowed the expansion of fiberoptic network capacity
without the expense and time required to install additional fiber cable,
and provided greater capacity on new fiber;
o the unprecedented growth 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");
o the Telecommunications Act of 1996, which purported 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
o an abundance of relatively low cost capital available for new company
formation, network development and expansion.
Together, these factors engendered the rapid and substantial installation
of fiberoptic networks, largely financed by debt, in anticipation of rapidly
growing bandwidth demand and future sales. As a result of the constantly
increasing demand, we focused much of our efforts on expanding 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. Consequently, our sales grew rapidly,
increasing from $87.1 million for the quarter ended June 30, 1999 to $925.1
million for the quarter ended December 31, 2000.
A-38
Since the beginning of 2001, the telecommunications industry has
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 is attributable to, among other
things:
o network overcapacity, as bandwidth demand, while continuing to grow, did
not reach levels sufficient to match the pace of network deployment;
o constrained capital markets;
o financial difficulties of certain major telecommunications carriers; and
o other factors, including the general inability of the CLECs to obtain
sufficient access to established telecommunications infrastructures, and
consolidation among telecommunications carriers.
All of these factors resulted in a severe decline in overall demand for new
fiberoptic networks and the components and modules used therein. During 2001 and
continuing into 2002, our telecommunications systems manufacturing customers
worked to reduce their inventories of components and modules purchased from our
competitors and us. Excess network capacity and limited availability of capital
for network installation and expansion have constrained the ability of these
inventories to be absorbed quickly. As the downturn deepened and continued into
2002, many telecommunications systems manufacturers and their carrier customers
were faced with insufficient revenues and cash reserves to service and repay the
significant debt they incurred during the prior growth period. Some of these
companies are working to restructure their debt, including, in the case of
carriers such as WorldCom and Global Crossing, through bankruptcy proceedings.
Some of these companies may not be successful in such efforts, in which event
they will be liquidated or acquired and consolidated. In the current
environment, these debt obligations continue to severely limit the funds
available for telecommunications equipment purchases and, thus, purchases of our
products. Also, over the last eighteen months many of the CLECs have gone out of
business, reducing the demand for new networks. As a result, the overall market
for new telecommunications systems and, accordingly, our products, has declined.
The impact of industry consolidation, continued inventory reductions among
our customers, increasing debt concerns at the systems manufacturer and carrier
levels, network overcapacity, and extremely limited access to capital for
network installation and expansion has severely harmed our business. We are not
anticipating any significant recovery in these markets at this time.
Nevertheless, we believe the telecommunications industry will ultimately
rebound from the current economic downturn and grow in the future for several
reasons:
o Internet traffic, an important driver of network expansion, is expected to
continue to grow;
o Internet traffic is increasingly expected to include content such as full
motion video (including high definition video) and multichannel high
quality audio, the delivery of which will place great demands on available
bandwidth. In particular, the entertainment industry is currently working
on the delivery of music and films over telecommunications systems;
o North America and Europe have comprised the majority of optical networking
deployment, but there could be significant additional potential with the
eventual development of other geographical markets, including Latin
America and Asia;
o Fiberoptic 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
remain largely untapped. We believe these markets represent a significant
future opportunity for our industry and for us. Moreover, we anticipate
that installation of metro fiberoptic systems will increase demand for
long-haul capacity as overall network traffic expands; and
o The demand for client-side or enterprise-level communications networks is
expected to continue to increase as global organizations continue to
upgrade and expand their information systems.
Consequently, we anticipate that over the long-term, fiberoptic
communications network development and expansion both through the installation
of new networks and through the upgrade and expansion of existing networks
A-39
will continue. 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.
In the meantime, while we continue to experience weakness in the
telecommunications industry, our optical technology businesses have made
significant contributions to our operating results, experiencing sales growth
for many of their products in areas such as projection display and security
markets. In addition, sales have been relatively stable for commercial lasers
for biotechnology, graphic arts and imaging, semiconductor processing and other
applications.
Global Realignment Program
We initiated the Global Realignment Program in April 2001, under which we
are restructuring our business in response to the economic downturn in the
telecommunications industry:
o Beginning in the fourth quarter of fiscal 2001 and continuing through the
end of fiscal 2002, we recorded total costs of $943.5 million related to
the implementation of the Global Realignment Program. The total costs
consisted of $524.3 million of charges associated with our Phase 1, Phase
2 and Phase 3 restructuring activities. In addition, we recorded a total
of $419.2 million in costs other than restructuring charges associated
with the Global Realignment Program.
o We have reduced our workforce by 15,450 employees under the Global
Realignment Program. As of June 30, 2002, we had 9,222 employees.
The following table presents a history of our employment levels:
Number of
Date Employees Explanation
---- --------- -----------
March 2001: 28,677 Our highest employment level.
Attrition and reductions in workforce prior to the inception of the
Less: (2,446) Global Realignment Program.
------
Employment level at the inception of the Global Realignment
April 2001: 26,231 Program.
Less: (15,450) Employees terminated under the Global Realignment Program.
Less: (1,559) Attrition not part of the Global Realignment Program.
-------
June 2002: 9,222 Employment at the end of fiscal 2002.
=======
o We have closed or scheduled to close 25 sites, vacated buildings at these
sites as well as at continuing operations, and reduced our manufacturing,
research and development, sales and administrative facilities by
approximately 3.3 million square feet, of which facilities representing
0.8 million square feet had been disposed of as of June 30, 2002.
The 25 sites closed or scheduled for closure were as follows:
North America: Asheville, North Carolina; Columbus, Ohio; Eatontown, New Jersey (1);
Freehold, New Jersey; Gloucester, Massachusetts; Manteca, California;
Ottawa, Ontario (2 sites); Piscataway, New Jersey; Richardson, Texas;
Rochester, New York; San Jose, California (2); Toronto, Ontario; Victoria,
British Columbia.
Europe: Arnhem, Netherlands; Bracknell, United Kingdom; Hillend, United Kingdom;
Oxford, United Kingdom; Plymouth, United Kingdom; Torquay, United
Kingdom; Waghaeusel-Kirrlach, Germany; Witham, United Kingdom.
Asia-Pacific: Shunde, China; Sydney, Australia; Taipei, Taiwan.
------------
(1) Portions of the operations at the Eatontown, New Jersey site are to
be relocated.
(2) The operations located in the San Jose, California site are related
to our commercial laser unit, which will be relocated to Santa Rosa,
California.
A-40
In response to the continued business downturn, we are planning further
restructuring activities under the Global Realignment Program, including further
reductions of employment, consolidations of facilities and additional site
closures. Prior to the inception of the Global Realignment Program in April
2001, our annual spending rate excluding inventory costs was approximately $1.7
billion. Since its inception, we have reduced our annual expenses to date by
approximately $955.0 million. We expect that, when completed in calendar year
2004, the Global Realignment Program will generate an additional $245.0 million
in annual cost savings for a total annual cost reduction rate of approximately
$1.2 billion.
The Global Realignment Program represents our concerted efforts to respond
to the current demands of our industry. However, these efforts may be
insufficient. The Global Realignment Program may not be successful in achieving
the expected cost reductions or other 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.
Please refer to the "Global Realignment Program Charges" section below for
further discussion of the implementation of our Global Realignment Program.
Recent Accounting Pronouncements
SFAS No. 141 and SFAS No. 142: In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method. In addition, SFAS No. 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. Specifically, SFAS No. 141 requires
that an intangible asset may be separately recognized only if such an asset
meets the contractual-legal criterion or the separability criterion.
On July 1, 2002, in accordance with SFAS No. 141, we have reassessed the
goodwill and intangible assets previously recorded in acquisitions prior to July
1, 2001 and determined that as of June 30, 2002, we had approximately $10.8
million of separately recognized intangible assets, consisting of acquired
assembled workforce, that did not meet the new recognition criteria for an
intangible asset to be recognized apart from goodwill. The carrying amount of
these intangible assets was reclassified to goodwill on July 1, 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives are no longer amortized but will be reviewed for impairment
annually, or more frequently if certain events or changes in circumstances
indicate that the carrying value may not be recoverable. The impairment test for
goodwill involves a two-step process: step one consists of a comparison of the
fair value of a reporting unit with its carrying amount, including the goodwill
allocated to each reporting unit. If the carrying amount is in excess of the
fair value, step two requires the comparison of the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill.
Any excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. The impairment test for intangible assets with indefinite useful lives
consists of a comparison of fair value to carrying value, with any excess of
carrying value over fair value being recorded as an impairment loss. Intangible
assets with finite useful lives will continue to be amortized over their useful
lives and will be reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Upon adoption
of SFAS No. 142, we are required to reassess the lives of identifiable
intangible assets and perform a first-year transitional impairment review
related to the carrying amount of goodwill as of July 1, 2002. Step one of the
transitional impairment review must be completed by the end of the second
quarter of fiscal 2003, and step two, if necessary, must be completed by the end
of the fourth quarter of fiscal 2003. Any transitional impairment loss will be
recognized as a cumulative effect of a change in accounting principle in the
Company's Consolidated Statements of Operations.
We adopted SFAS No. 142 on July 1, 2002. However, goodwill and intangible
assets with indefinite useful lives acquired after June 30, 2001 were
immediately subject to the non-amortization provision of SFAS No. 142. As such,
goodwill totaling $236.8 million associated with our acquisitions of IBM's
optical transceiver business in December 2001 and Scion in April 2002 was not
amortized in fiscal 2002. The adoption of SFAS No. 142 is expected to have a
material impact on our results of operations primarily because goodwill will no
longer be amortized. Application of the non-amortization provisions will
eliminate goodwill amortization of approximately $26.4 million in fiscal 2003
related to acquisitions completed prior to July 1, 2001, assuming there are no
further impairment charges related to the carrying amount of the goodwill.
A-41
In conjunction with the implementation of SFAS No. 142, we are currently
performing step one of the transitional impairment review related to the
carrying amount of goodwill as of July 1, 2002 and expect to complete the review
by the end of the first quarter of fiscal 2003.
A reconciliation of the reported net loss and net loss per share to the
amounts adjusted for the exclusion of amortization of: (i) goodwill from
acquisitions, (ii) equity method goodwill related to ADVA and (iii) assembled
workforce, net of the related tax effect, was as follows (in millions, except
per-share data):
Years Ended June 30,
-------------------------------------------
2002 2001 2000
--------- ---------- --------
Reported net loss $(8,738.3) $(56,121.9) $(904.7)
Add back:
Amortization of:
Goodwill from acquisitions 937.5 4,945.9 689.1
Equity method goodwill related to ADVA 0.7 136.2 --
Assembled workforce 12.5 16.6 6.2
Income tax expense (32.1) (94.0) (22.7)
--------- ---------- --------
Adjusted net loss $(7,819.7) $(51,117.2) $ (232.1)
========= ========== ========
Reported net loss per share -- basic and diluted $ (6.50) $ (51.40) $ (1.27)
========= ========== ========
Adjusted net loss per share -- basic and diluted $ (5.82) $ (46.81) $ (0.33)
========= ========== ========
SFAS No. 144: In August 2001, the FASB issued SFAS No. 144, which
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and certain provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
retains the fundamental provisions of SFAS No. 121 related to: (i) the
recognition and measurement of the impairment of long-lived assets to be held
and used, and (ii) the measurement of long-lived assets to be disposed by sale.
It provides more guidance on estimating cash flows when performing
recoverability tests, requires long-lived assets to be disposed of other than by
sale to be classified as held and used until disposal, and establishes more
restrictive criteria to classify long-lived assets as held for sale. In
addition, SFAS No. 144 supersedes the accounting and reporting provisions of APB
Opinion No. 30 for the disposal of a segment of a business. However, it retains
the basic provisions of APB Opinion No. 30 to report discontinued operations
separately from continuing operations and extends the reporting of a
discontinued operation to a component of an entity.
We adopted SFAS No. 144 on July 1, 2002. Under SFAS No. 121, excluding
asset write-downs associated with the Global Realignment Program, we recorded
impairment charges of $5,979.4 million in fiscal 2002 and $50,085.0 million in
fiscal 2001. The adoption of SFAS No. 144 may have a material impact on our
financial position and results of operations if the industry and economic
downturn continues to affect our operations and sales forecasts, primarily
because SFAS No. 144 excludes goodwill, which may result in certain long-lived
assets being subject to impairment charges sooner than they would have been
recorded under SFAS No. 121.
SFAS No. 146: In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. In addition, SFAS No. 146 establishes that fair value is the objective for
initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, but early adoption is
permitted. We are currently evaluating the adoption date and the impact the
adoption will have on our financial position and results of operations.
Other: In connection with their ongoing consolidations project, the FASB
issued an exposure draft ("ED"), "Consolidation of Certain Special-Purpose
Entities, an Interpretation of ARB No. 51," for public comment in June 2002.
The ED could substantially change the accounting for synthetic leases. The
comment period on the ED ended
A-42
on August 30, 2002 and the final guidance may become effective for us in the
fourth quarter of fiscal 2003. We are currently assessing the impact the ED will
have on an operating lease (please refer to "Note 5. Commitments and
Contingencies" of Notes to Consolidated Financial Statements under Item 8 of
this Annual Report for further discussion of this lease). If the final statement
is consistent with the ED, we may be required to consolidate the special purpose
entity associated with the operating lease, resulting in our recording the
properties at approximately $44.6 million and the debt associated with the
properties on our balance sheet. Alternatively, we may exercise our purchase
option under the terms of the master lease agreement and purchase the
properties. This action would result in our recording the properties on our
balance sheet, and our cash collateral would be used to pay the purchase price
of the properties.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities, net sales and expenses, and the related disclosures. We base our
estimates on historical experience, our knowledge of economic and market factors
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
are affected by significant estimates, assumptions and judgments used in the
preparation of our consolidated financial statements.
Revenue Recognition:
- --------------------
We recognize revenue when persuasive evidence of a final agreement exists,
delivery has occurred, the selling price is fixed or determinable and
collectibility is reasonably assured. Revenue recognition on the shipment of
evaluation units is deferred until customer acceptance. Revenue from sales to
distributors with rights of return, price protection or stock rotation is not
recognized until the products are sold through to end customers. Generally,
revenue associated with contract cancellation payments from customers is not
recognized until we receive payment for such charges.
We record provisions against our gross revenue for estimated product
returns and allowances in the period when the related revenue is recorded. These
estimates are based on factors that include, but not limited to, historical
sales returns, analyses of credit memo activities, current economic trends and
changes in our customers' demand. Should our actual product returns and
allowances exceed our estimates, additional provisions against our revenue would
result.
Allowances for Doubtful Accounts:
- ---------------------------------
We perform ongoing credit evaluations of our customers' financial
condition. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required
payments. We record our bad debt expenses as selling, general and administrative
expenses. When we become aware that a specific customer is unable to meet its
financial obligations to us, such as bankruptcy or deterioration in the
customer's operating results or financial position, we record a specific
allowance to reflect the level of credit risk in the customer's outstanding
receivable balance. In addition, we record additional allowances based on
certain percentages of our aged receivable balances. These percentages are
determined by a variety of factors including, but not limited to, current
economic trends, historical payment and bad debt write-off experience. We are
not able to predict changes in the financial condition of our customers, and if
circumstances related to our customers deteriorate, our estimates of the
recoverability of our trade receivables could be materially affected and we may
be required to record additional allowances. Alternatively, if we provide more
allowances than we need, we may reverse a portion of such provisions in future
periods based on our actual collection experience.
Investments:
- ------------
We hold equity interests in both publicly traded and privately held
companies. When the carrying value of an investment exceeds its fair value and
the decline in value is deemed to be other-than-temporary, we write down the
value of the investment and establish a new cost basis. Fair values for
investments in public companies are determined using quoted market prices. Fair
values for investments in privately held companies are estimated based
A-43
upon the values of recent round of financings or analyses of historical and
forecasted financial information. We regularly evaluate our investments based on
criteria that include, but not limited to, the duration and extent to which the
fair value has been less than the carrying value, the current economic
environment and the duration of any market decline, and the financial health and
business outlooks of the investees. We generally believe an other-than-temporary
decline occurs when the fair value of an investment is below the carrying value
for two consecutive quarters. Future adverse changes in these or other factors
could result in an other-than-temporary decline in the value of our investments,
thereby requiring us to write down such investments. Our ability to liquidate
our investment positions in privately held companies will be affected to a
significant degree by the lack of an actively traded market, and we may not be
able to dispose of these investments in a timely manner.
Inventory Valuation:
- --------------------
We regularly assess the valuation of our inventories and write down those
inventories which are obsolete or in excess of our forecasted usage to their
estimated realizable value. Our estimates of realizable value are based upon our
analyses and assumptions including, but not limited to, forecasted sales levels
by product, expected product lifecycle, product development plans and future
demand requirements. We typically use a six-month rolling forecast based on
factors including, but not limited to, our production cycle, anticipated product
orders, marketing forecasts, backlog, shipment activities and inventories held
at our customers. If market conditions are less favorable than our forecasts or
actual demand from our customers is lower than our estimates, we may be required
to record additional inventory write-downs. If demand is higher than expected,
we may sell our inventories that had previously been written down.
Long-Lived Assets:
- ------------------
We evaluate the carrying value of our long-lived assets, consisting
primarily of goodwill and identifiable intangible assets, and property, plant
and equipment, whenever certain events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable. Such events or
circumstances include, but not limited to, a prolonged industry downturn, a
significant decline in our market value, or significant reductions in projected
future cash flows. In assessing the recoverability of our long-lived assets, we
compare the carrying value to the undiscounted future cash flows the assets are
expected to generate. If the total of the undiscounted future cash flows is less
than the carrying amount of the assets, we write down such assets based on the
excess of the carrying amount over the fair value of the assets. Fair value is
generally determined by calculating the discounted future cash flows using a
discount rate based upon our weighted average cost of capital. Significant
judgments and assumptions are required in the forecast of future operating
results used in the preparation of the estimated future cash flows, including
profit margins, long-term forecasts of the amounts and timing of overall market
growth and our percentage of that market, groupings of assets, discount rates
and terminal growth rates. In addition, significant estimates and assumptions
are required in the determination of the fair value of our tangible long-lived
assets, including replacement cost, economic obsolescence, and the value that
could be realized in orderly liquidation. Changes in these estimates could have
a material adverse effect on the assessment of our long-lived assets, thereby
requiring us to write down the assets.
Deferred Taxes:
- ---------------
We regularly assess the likelihood that our deferred tax assets will be
realized from recoverable income taxes or recovered from future taxable income
over the next 3 years, and we record a valuation allowance to reduce our
deferred tax assets to the amount that we believe to be more likely than not
realizable. Due to the uncertain economic conditions in our industry, we
determined in fiscal 2002 that we should increase our valuation allowance for
deferred tax assets to reduce our net deferred tax assets to an amount
representing income taxes recoverable from prior years.
Warranty Accrual:
- -----------------
We provide reserves for the estimated costs of product warranties at the
time revenue is recognized. We estimate the costs of our warranty obligations
based on our historical experience of known product failure rates, use of
materials to repair or replace defective products and service delivery costs
incurred in correcting product failures. In addition, from time to time,
specific warranty accruals may be made if unforeseen technical problems arise.
A-44
Should our actual experience relative to these factors differ from our
estimates, we may be required to record additional warranty reserves.
Alternatively, if we provide more reserves than we need, we may reverse a
portion of such provisions in future periods.
Restructuring Accrual:
- ----------------------
We implemented our Global Realignment Program in April 2001 and have
developed formalized plans for restructuring our businesses. The current
accounting for restructuring costs requires us to record provisions and charges
when we have a formal and committed plan. In connection with these plans, we
have recorded estimated expenses for severance and outplacement costs, lease
cancellations, asset write-offs and other restructuring costs. Given the
significance of, and the timing of the execution of such activities, this
process is complex and involves periodic reassessments of estimates made at the
time the original decisions were made. We continually evaluate the adequacy of
the remaining liabilities under our restructuring initiatives. Although we
believe that these estimates accurately reflect the costs of our restructuring
plans, actual results may differ, thereby requiring us to record additional
provisions or reverse a portion of such provisions.
Results of Operations
The following table sets forth the components of our Consolidated
Statements of Operations as a percentage of net sales:
Years Ended June 30,
---------------------------
2002 2001 2000
------ -------- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 106.6 71.4 52.5
------ -------- -----
Gross profit (loss) (6.6) 28.6 47.5
Operating expenses:
Research and development 23.2 10.1 7.9
Selling, general and administrative 34.8 25.3 12.2
Amortization of purchased intangibles 119.2 166.6 62.7
Acquired in-process research and development 2.3 12.2 25.2
Reduction of goodwill and other long-lived assets 544.5 1,549.3 --
Restructuring charges 23.7 8.2 --
------ -------- -----
Total operating expenses 747.7 1,771.7 108.0
------ -------- -----
Loss from operations (754.3) (1,743.1) (60.5)
Interest and other income, net 4.4 1.5 2.5
Gain on sale of subsidiaries -- 54.8 --
Gain (loss) on sale of investments 1.4 (17.3) --
Reduction in fair value of investments (20.6) (16.2) --
Loss on equity method investments, net (5.0) (27.3) --
------ -------- -----
Loss before income taxes (774.1) (1,747.6) (58.0)
Income tax expense (benefit) 21.6 (11.5) 5.2
------ -------- -----
Net loss (795.7)% (1,736.1)% (63.2)%
====== ======== =====
Net Sales:
Net sales of $1,098.2 million in fiscal 2002 represents a decrease of
$2,134.6 million, or 66%, from net sales of $3,232.8 million in fiscal 2001. Net
sales in fiscal 2002 included net sales of $43.3 million from IBM's optical
transceiver business and Scion, both of which were acquired in fiscal 2002. The
decline in our sales was primarily due to lower demand for our products and
lower average selling prices, both of which were caused by the dramatic downturn
in the telecommunications industry. The downturn resulted in a decrease in
network deployment and capital spending by telecommunications carriers, which in
turn caused our customers to reduce their inventory
A-45
levels. Although net sales of our non-telecommunications businesses, which
primarily consist of our thin film products, were also negatively affected by
the economic downturn, these businesses experienced sequential growth in the
third and fourth quarters of fiscal 2002. Due to the slowdown in the
telecommunications industry, our non-telecommunications businesses have become
more significant to our total net sales, accounting for 26% of net sales in
fiscal 2002, compared to 12% in fiscal 2001.
Net sales in fiscal 2002 included approximately $44.9 million of contract
cancellation payments. We generally recognize such cancellation revenue upon
receipt of payment from our customers.
Net sales of $3,232.8 million in fiscal 2001 represents an increase of
$1,802.4 million, or 126%, over net sales of $1,430.4 million in fiscal 2000.
However, quarterly net sales for the fourth quarter of fiscal 2001 declined
$319.0 million compared to the third quarter of fiscal 2001 because of the
business downturn in the telecommunications industry. Net sales for the
Transmission and Network Components operating segment increased 128% in fiscal
2001 compared to fiscal 2000. The increase in net sales was due to the
acquisitions of SDL and E-TEK and higher unit sales of telecommunication
products including optical amplifiers, transmitters, modulators, pump lasers,
wavelength division multiplexers and waveguides. The impact of the SDL and E-TEK
acquisitions provided $804.1 million of net sales for fiscal 2001 as their
acquisitions were accounted for as purchases. Net sales for the Thin Film
Products and Instrumentation operating segment increased 115% in fiscal 2001
compared to fiscal 2000. The increase in net sales was primarily due to higher
unit sales of instruments and commercial lasers, as well as the inclusion of a
full year of net sales of $321.4 million from OCLI in fiscal 2001, compared to a
partial year of net sales of $112.5 million in fiscal 2000.
Net sales to customers outside North America accounted for $290.9 million,
$1,043.4 million and $326.7 million of total net sales, or 26%, 32% and 23%, for
the years ended June 30, 2002, 2001 and 2000, respectively.
During fiscal 2002, no customer accounted for more than 10% of total net
sales. During fiscal 2001, three customers, Nortel Networks ("Nortel"), Alcatel,
and Lucent Technologies ("Lucent"), accounted for 14%, 12% and 10% of total net
sales, respectively. During fiscal 2000, Lucent and Nortel accounted for 21% and
15% of total net sales, respectively. 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. However, if the downturn in the telecommunications
industry continues, we expect telecommunications carriers to continue to have
low levels of capital spending, which will further affect our customers', and in
turn, our sales.
Please refer to the "Operating Segment Information" section below for
further discussions with respect to net sales and operating results for each of
our operating segments.
Gross Margin:
Gross margin as a percentage of net sales was minus 7% in fiscal 2002,
compared to 29% in fiscal 2001 and 48% in fiscal 2000. The decrease in gross
margin in fiscal 2002 from fiscal 2001 was primarily attributable to the
following factors: (i) reductions in sales volume coupled with a continued
decline in average selling prices; (ii) a lower margin product mix due to lower
sales of high-margin telecommunications components; (iii) $203.9 million of
write-downs of excess and obsolete inventories in fiscal 2002, or 19% of total
net sales, compared to $510.6 million, or 16% of total net sales, in fiscal
2001; (iv) costs other than restructuring charges associated with the Global
Realignment Program of $124.6 million, or 11% of total net sales, in fiscal
2002, primarily consisting of depreciation charges associated with the impact of
changes in the estimated useful lives of property and equipment, as compared to
$220.7 million, or 7% of total net sales, in fiscal 2001; and (v) stock
compensation expense of $41.1 million in fiscal 2002, or 4% of total net sales,
as compared to $18.2 million, or less than 1% of total net sales, in fiscal
2001. The negative impact on gross margin in fiscal 2002 was offset by the
following: (i) consumption of inventories previously written down that had an
original cost of $77.4 million, or 7% of total net sales; and (ii) contract
cancellation payments of $44.9 million, or 4% of total net sales, from our
customers as discussed above.
Gross margin decreased in fiscal 2001 from fiscal 2000 primarily due to the
following factors: (i) inventory write-downs and loss incurred on purchase
commitments on inventories 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; (ii) the
impact of purchase accounting adjustments of $71.5 million to reflect the fair
value of inventory associated with acquired entities; and (iii) stock
compensation expense of $18.2 million.
A-46
Our gross margin can 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, we may have
excess or shortfalls of some materials and components as well as excess
inventory purchase commitments. Furthermore, we could experience reduced or
delayed product shipments or 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:
Research and development ("R&D") expense was $254.8 million in fiscal 2002,
compared to $325.9 million in fiscal 2001 and $113.4 million in fiscal 2000. The
decrease in R&D spending in fiscal 2002 from fiscal 2001 reflects the cost
reductions resulting from our Global Realignment Program, which included the
elimination of certain product development programs and workforce reductions.
The decrease in R&D spending was partially offset by the following: (i) stock
compensation expense of $31.3 million in fiscal 2002 primarily associated with
SDL and OPA, compared to $12.1 million in fiscal 2001; (ii) the inclusion of
$13.4 million of additional R&D expenses from our acquisitions of IBM's optical
transceiver business and Scion in fiscal 2002; and (iii) costs other than
restructuring charges under the Global Realignment Program of $8.2 million in
fiscal 2002, as compared to $2.9 million in fiscal 2001. The increase in R&D
expense as a percentage of total net sales was due to our net sales declining
more rapidly than our R&D spending.
The increase in R&D spending in fiscal 2001 over fiscal 2000 was primarily
due to the continued development and enhancement of our transmission and network
components and thin film filters products, and the inclusion of our acquisition
of E-TEK completed at the end of fiscal 2000.
We believe that continued investment in R&D is critical to attaining our
strategic objectives. However, due to our Global Realignment Program, we expect
our absolute dollar amount of R&D expenses to decline in fiscal 2003. There can
be no assurance that improved processes or commercial products will result from
our R&D projects.
Selling, General and Administrative Expense:
Selling, general and administrative ("SG&A") expense was $382.9 million in
fiscal 2002, compared to $818.1 million in fiscal 2001 and $172.9 million in
fiscal 2000. SG&A expenses in fiscal 2001 included a one-time charge of $300.9
million of indirect acquisition costs paid to certain SDL executives. Excluding
this one-time charge, the decrease in SG&A spending in fiscal 2002 from fiscal
2001 was primarily due to the following: (i) lower personnel-related expenses
resulting from the reductions of workforce; (ii) lower commission expenses due
to the decline in sales; and (iii) lower payroll tax expenses on non-qualified
stock option exercises. These cost reductions were primarily offset by higher
depreciation charges from the implementation of our Enterprise Resource Planning
("ERP") software and the inclusion of $9.6 million of SG&A expenses from our
acquisitions of IBM's optical transceiver business and Scion in fiscal 2002. The
increase in SG&A expense as a percentage of total net sales was due to our net
sales declining more rapidly than our SG&A spending.
Excluding the one-time charge of $300.9 million of indirect acquisition
costs paid to certain SDL executives, the increase in SG&A expense in fiscal
2001 over fiscal 2000 was primarily due to the following: (i) higher
personnel-related costs to support the growth in sales and operations; (ii)
expansion of our information systems infrastructure; (iii) inclusion of SG&A
expenses from our E-TEK and SDL acquisitions; (iv) stock compensation charges of
$24.2 million associated with certain of our acquisitions; (v) increase in bad
debt expense of $25.6 million; (vi) litigation settlement of approximately $22.8
million; and (vii) higher payroll tax expenses related to the exercise of
non-qualified stock options of $20.9 million.
During the first quarter of fiscal 2003, we entered into an agreement to
upgrade our current ERP software and to outsource the operations and maintenance
of the upgraded applications. This decision is expected to result in increased
depreciation during fiscal 2003 as a result of a change in the estimated useful
life of the related software and license fees as well as the computing hardware.
Although the accelerated depreciation will increase our SG&A expenses in fiscal
2003, we expect the overall level of our SG&A expenses to continue to decrease
as a result of our continued efforts to reduce expenses under the Global
Realignment Program.
A-47
Amortization of Purchased Intangibles:
In fiscal 2002, amortization of purchased intangibles was $1,308.7 million,
compared to $5,387.0 million in fiscal 2001 and $896.9 million in fiscal 2000.
The decrease in amortization expense in fiscal 2002 over fiscal 2001 was
primarily due to the write-downs of the carrying amounts of our goodwill and
other intangible assets as a result of the impairment analyses performed in
accordance with SFAS No. 121 (please refer to the "Reduction in Goodwill and
Other Intangibles" section below for further discussion).
The increase in amortization expense in fiscal 2001 over fiscal 2000 was
primarily due to the additional goodwill and other intangible assets related to
our acquisitions of SDL, OPA, Iridian and Epion in fiscal 2001 and E-TEK at the
end of fiscal 2000.
The impact of amortization expense on our results of operations is expected
to decline in the future. If the current unfavorable economic downturn continues
and our revenue forecasts continue to decrease, our remaining intangible assets
may be impaired, thereby requiring us to write down their carrying value
further. In addition, beginning July 1, 2002, goodwill is no longer amortized in
accordance with SFAS No. 142. As of June 30, 2002, the carrying amount of our
goodwill was $332.2 million.
Acquired In-process Research and Development:
In fiscal 2002, we recorded charges of $25.3 million for acquired
in-process research and development ("IPR&D") resulting from our acquisition of
IBM's optical transceiver business ($22.1 million) and Scion ($3.2 million). In
fiscal 2001, we recorded charges of $393.2 million resulting from the
acquisition of SDL ($380.7 million), OPA ($3.0 million), Iridian ($0.6 million)
and Epion ($8.9 million). In fiscal 2000, we recorded charges of $360.7 million
resulting from the acquisition of EPITAXX ($16.7 million), SIFAM ($3.0 million),
OCLI ($84.1 million), Cronos ($6.3 million) and E-TEK ($250.6 million). 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 acquisition of businesses, products or
technologies by us in the future will not result in substantial charges for
acquired IPR&D.
A description of the acquired IPR&D, stage of development, estimated date
of completion and costs to complete for our fiscal 2002 acquisitions, as well as
the current status of the acquired IPR&D projects for each acquisition prior to
fiscal 2002 can be found at the end of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
A-48
Reduction of Goodwill and Other Long-Lived Assets:
During fiscal 2002 and 2001, we recorded $5,979.4 million and $50,085.0
million, respectively, of reductions of goodwill and other long-lived assets in
accordance with SFAS No. 121, excluding asset write-downs associated with the
Global Realignment Program. No such charges were recorded in fiscal 2000. The
following table summarizes the components of the reductions of goodwill and
other long-lived assets in total and by operating segments (in millions):
Years Ended June 30,
-----------------------
2002 2001
-------- ---------
Goodwill $4,360.8 $49,699.5
Other intangible assets 1,243.1 375.3
Property, plant and equipment 375.5 10.2
-------- ---------
Total reductions of goodwill and other long-lived assets $5,979.4 $50,085.0
======== =========
By Operating Segments:
- ----------------------
Transmission and Network Components:
Goodwill $3,808.4 $48,581.4
Other intangible assets 1,031.6 298.1
Property, plant and equipment 308.3 1.6
-------- ---------
Total $5,148.3 $48,881.1
======== =========
Thin Film Products and Instrumentation:
Goodwill $ 552.4 $ 1,118.1
Other intangible assets 211.5 77.2
Property, plant and equipment 67.2 8.6
-------- ---------
Total $ 831.1 $ 1,203.9
======== =========
Fiscal 2002:
- ------------
As part of our quarterly reviews of financial results for fiscal 2002, we
evaluated the carrying value of our long-lived assets, including significant
amounts of goodwill and other intangible assets recorded in connection with our
various acquisitions. The assessments were performed pursuant to SFAS No. 121
because of the prolonged economic downturn affecting our operations and expected
future sales. As we determined that the continued decline in market conditions
within our industry was significant and other-than-temporary during the second,
third and fourth quarters of fiscal 2002, we recorded charges to reduce goodwill
and other long-lived assets based on the amounts by which the carrying amounts
of these assets exceeded their fair value. Fair value was determined based on
discounted future cash flows for the operating entities that had separately
identifiable cash flows. During the fourth quarter of fiscal 2002, we were
required to value certain of our tangible long-lived assets using specific
appraisals because the remaining goodwill associated with certain asset
groupings had been completely written down.
Second-Quarter Write-Downs:
We recorded total write-downs of $1,267.6 million, of which $1,265.1
million was related to goodwill and $2.5 million was related to other intangible
assets. The goodwill and other intangible assets were primarily associated with
the acquisition of SDL and OCLI. We assumed a cash flow period of 5 years,
long-term annual growth rates of 5% to 60%, a discount rate of 14%, and terminal
values were based upon estimated terminal growth rates of 5% to 7%.
Third-Quarter Write-Downs:
We recorded total write-downs of $3,884.1 million, of which $2,871.5
million was related to goodwill, $925.3 million was related to other intangible
assets and $87.3 million was related to property, plant and equipment. The
goodwill and other intangible assets were primarily associated with the
acquisition of JDS FITEL, SDL, E-TEK and OCLI. We assumed a cash flow period of
5 years, long-term annual growth rates of 4% to 35%, a discount rate of 14%, and
terminal values were based upon estimated terminal growth rates of 5% to 7%.
A-49
Fourth-Quarter Write-Downs:
We recorded total write-downs of $785.7 million, of which $193.0 million
was related to goodwill, $304.5 million was related to other intangible assets
and $288.2 million was related to property, plant and equipment. The goodwill
and other intangible assets were primarily associated with the acquisition of
EPITAXX, JDS FITEL and SDL. We assumed a cash flow period of 5 years, long-term
annual growth rates of 10% to 50%, a discount rate of 14%, and terminal values
were based upon an estimated terminal growth rate of 7%.
The assumptions supporting the estimated future cash flows for all
impairment analyses, including the long-term annual growth rates, discount rates
and terminal values, reflect management's best estimates. The discount rates
were based upon our weighted average cost of capital as adjusted for the risks
associated with our operations.
Other Write-Downs:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002, we restructured certain of our businesses and realigned our
operations to focus on our more attractive markets and core opportunities. In
the process, we abandoned certain redundant products and product platforms and
reduced our workforce that had been valued in previous acquisitions. In
accordance with SFAS No. 121, we wrote down the related intangible assets to
their fair value, which was deemed to be zero, and recorded total charges of
$42.0 million, of which $31.2 million was related to goodwill and $10.8 million
was related to other intangible assets.
Fiscal 2001:
- ------------
Beginning in the third quarter of fiscal 2001, we evaluated the carrying
value of our long-lived assets pursuant to SFAS No. 121 because of the prolonged
economic downturn affecting our operations and expected future sales. As we
determined that the continued decline in market conditions within our industry
was significant and other-than-temporary during the third and fourth quarters of
fiscal 2001, we recorded charges to reduce goodwill and other long-lived assets
based on the amounts by which the carrying amounts of these assets exceeded
their fair value. Fair value was determined based on discounted future cash
flows for the operating entities that had separately identifiable cash flows.
Third-Quarter Write-Downs:
We recorded total write-downs of $39,777.1 million related to goodwill
primarily associated with the acquisition of SDL, E-TEK and OCLI. We assumed a
cash flow period of 5 years, long-term annual growth rates of 15% to 40%, a
discount rate of 13%, and terminal values were based upon an estimated terminal
growth rate of 7%.
Fourth-Quarter Write-Downs:
We recorded total write-downs of $6,934.3 million, of which $6,846.9
million was related to goodwill, $77.2 million was related to other intangible
assets and $10.2 million was related to property, plant and equipment. The
goodwill and other intangible assets were primarily associated with the
acquisition of SDL, E-TEK and OCLI. We assumed a cash flow period of 5 years,
long-term annual growth rates of 15% to 60%, a discount rate of 14.5%, and
terminal values were based upon an estimated terminal growth rate of 7%.
The assumptions supporting the estimated future cash flows for all
impairment analyses, including the long-term annual growth rates, discount rates
and terminal values, reflect management's best estimates. The discount rates
were based upon our weighted average cost of capital as adjusted for the risks
associated with our operations.
Other Write-Downs:
As a result of the Phase 1 restructuring activities in the fourth quarter
of fiscal 2001, we restructured certain of our businesses and realigned our
operations to focus on our more attractive markets and core opportunities. In
the process, we abandoned certain redundant products and product platforms and
reduced our workforce that had
A-50
been valued in previous acquisitions. In accordance with SFAS No. 121, we wrote
down the related intangible assets to their fair value, which was deemed to be
zero, and recorded total charges of $3,373.6 million, of which $3,075.5 million
was related to goodwill and $298.1 million was related to other intangible
assets.
Global Realignment Program Charges (Restructuring and Other Charges):
Overview:
- ---------
In April 2001, we initiated the Global Realignment Program, under which we
are restructuring our business in response to the economic downturn in the
telecommunications industry. Through the end of fiscal 2002, we implemented
three phases of restructuring activities and recorded restructuring charges of
$264.3 million ("Phase 1") in fiscal 2001, $243.0 million ("Phase 2") and $42.0
million ("Phase 3") in fiscal 2002. These restructuring charges were offset by
total adjustments and cash proceeds received of $25.0 million. In addition, we
recorded other charges of $236.5 million in fiscal 2001 and $182.7 million in
fiscal 2002 related to the Global Realignment Program.
Under the Global Realignment Program, we are consolidating and reducing our
manufacturing, research and development, sales and administrative facilities in
North America, Europe and Asia-Pacific. The total number of sites closed or
scheduled for closure is 25. Based on decisions made through the end of fiscal
2002, we will reduce our total workforce by approximately 16,550 employees. As
of June 30, 2002, 15,450 employees have been terminated.
Phase 1 Restructuring Activities:
- ---------------------------------
The following table summarizes our Phase 1 restructuring activities from
inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------- ------ -------
Total restructuring charges -- Phase 1 $ 79.1 $ 122.2 $ 63.0 $ 264.3
Cash payments (24.9) -- (0.9) (25.8)
Non-cash charges (11.1) (122.2) -- (133.3)
------ ------- ------ -------
Balance as of June 30, 2001 43.1 -- 62.1 105.2
Cash payments (31.3) -- (17.0) (48.3)
Adjustments (10.5) 5.1 0.7 (4.7)
Cash proceeds in excess of salvage value -- (2.4) -- (2.4)
Non-cash charges -- (2.7) -- (2.7)
------ ------- ------ -------
Balance as of June 30, 2002 $ 1.3 $ -- $ 45.8 $ 47.1
====== ======= ====== =======
In connection with the Phase 1 restructuring activities, management with
the appropriate level of authority approved and committed us to plans to close 9
sites, vacate buildings at the closed sites as well as at continuing operations,
and reduce our workforce by approximately 8,800 employees. These sites were
located 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.
Workforce Reduction:
During the fourth quarter of fiscal 2001, we recorded total charges of
$79.1 million primarily related to severance and fringe benefits associated with
the reduction of approximately 8,800 employees, which includes non-cash
severance charges of $11.1 million related to the modification of a former
executive's stock options. During fiscal 2002, we recorded a decrease of $10.5
million to the accrual balance, as the actual amounts paid for such charges were
lower than originally estimated.
Of the 8,800 terminations for which costs have been accrued, approximately
8,100 were engaged in manufacturing, 200 in research and development, and 500 in
selling, general and administrative functions. Approximately 7,100, 900, and 800
were located in North America, Europe and Asia-Pacific, respectively. As of
A-51
June 30, 2002, we have completed our Phase 1 workforce reduction. The remaining
accrual balance reflects ongoing severance and benefit payments to the
terminated employees.
Facilities and Equipment and Lease Commitments:
During the fourth quarter of fiscal 2001, property and equipment that were
disposed of or removed from operations resulted in a charge of $122.2 million,
of which $89.3 million was related to the Transmission and Network Components
operating segment, $29.4 million was related to the Thin Film Products and
Instrumentation operating segment and $3.5 million was related to other
operating segments. The property and equipment write-downs consisted primarily
of owned buildings, leasehold improvements, computer equipment and related
software, production and engineering equipment, and office equipment, furniture
and fixtures. During fiscal 2002, we recorded total adjustments of $5.1 million
primarily due to additional declines in the fair market value of owned buildings
held for disposal. In addition, we received approximately $2.4 million of cash
proceeds in excess of the estimated salvage value of certain restructured assets
sold through auctions.
We have substantially completed the disposal of our restructured assets
through auctions, donations and scrapping of the assets. The remaining assets
are primarily owned buildings that could not be sold within 12 months as was
previously expected. The market conditions in the cities where these buildings
are located, Plymouth, United Kingdom and Taipei, Taiwan, have continued to
weaken during fiscal 2002. This was exacerbated with the continued economic
downturn in the telecommunications industry. We currently anticipate disposing
of these assets within the next 6 to 12 months.
During the fourth quarter of fiscal 2001, we incurred charges 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 real estate market conditions. During fiscal 2002, we recorded a net
increase of $0.7 million to the accrual balance. This adjustment consisted of an
increase of $8.4 million due to changes in real estate market conditions, which
resulted in changes regarding estimated vacancy periods and sublease income,
offset by a decrease of $7.7 million as a result of negotiating subleases and
termination agreements. We anticipate that it will take approximately 5 to 54
months to sublease the remaining various vacated properties. Amounts related to
the lease expense, net of anticipated sublease proceeds, will be paid over the
respective lease terms through fiscal 2018.
Phase 2 Restructuring Activities:
- ---------------------------------
The following table summarizes our Phase 2 restructuring activities from
inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------- ------ -------
Total restructuring charges -- Phase 2 $ 55.8 $ 141.3 $ 45.9 $ 243.0
Cash payments (47.2) -- (13.6) (60.8)
Adjustments ( 5.0) (2.9) (6.8) (14.7)
Cash received in excess of salvage value -- (3.2) -- (3.2)
Non-cash charges -- (135.2) -- (135.2)
------ ------- ------ -------
Balance as of June 30, 2002 $ 3.6 $ -- $ 25.5 $ 29.1
====== ======= ====== =======
In connection with the Phase 2 restructuring activities, management with
the appropriate level of authority approved and committed us to plans to close 8
sites, vacate buildings at the closed sites as well as at continuing operations,
and reduce our workforce by approximately 5,400 employees. These sites were
located in Arnhem, Netherlands; Gloucester, Massachusetts; Manteca, California;
Plymouth, United Kingdom; Victoria, British Columbia; Witham, United Kingdom;
and two sites in Ottawa, Ontario.
A-52
Workforce Reduction:
During the first quarter of fiscal 2002, we recorded total charges of $55.8
million primarily related to severance and fringe benefits associated with the
reduction of approximately 5,400 employees. During fiscal 2002, we recorded a
decrease of $5.0 million to the accrual balance, as the actual amounts paid for
such charges were lower than originally estimated.
Of the 5,400 terminations for which costs have been accrued, approximately
4,500 were engaged in manufacturing, 400 in research and development, and 500 in
selling, general and administrative functions. Approximately 5,050, 300, and 50
were located in North America, Europe and Asia-Pacific, respectively. As of June
30, 2002, approximately 5,200 employees have been terminated. We expect to
complete our Phase 2 workforce reduction by the end of the first quarter of
fiscal 2003.
Facilities and Equipment and Lease Commitments:
During the first quarter of fiscal 2002, property and equipment that were
disposed of or removed from operations resulted in total charges of $141.3
million, of which $129.5 million was related to the Transmission and Network
Components operating segment and $11.8 million was related to the Thin Film
Products and Instrumentation operating segment. The property and equipment
write-downs consisted primarily of leasehold improvements, computer equipment
and related software, production and engineering equipment, and office
equipment, furniture and fixtures. During fiscal 2002, we recorded total
adjustments of $2.9 million as a result of differences between the actual and
estimated net book value of assets written down. In addition, we received
approximately $3.2 million of cash proceeds in excess of the estimated salvage
value of certain restructured assets sold through auctions. We expect to
substantially complete our disposal of the restructured assets by the end of the
first quarter of fiscal 2003.
During the first quarter of fiscal 2002, we accrued total charges of $45.9
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 real estate market conditions. During fiscal 2002, we recorded a net
decrease of $6.8 million to the accrual balance. This adjustment consisted of a
decrease of $7.4 million due to changes in real estate market conditions, which
resulted in changes regarding estimated vacancy periods and sublease income,
offset by an increase of $0.6 million as a result of negotiating subleases and
termination agreements. We anticipate that it will take approximately 12 to 35
months to sublease the remaining various vacated properties. Amounts related to
the lease expense, net of anticipated sublease proceeds, will be paid over the
respective lease terms through fiscal 2011.
Phase 3 Restructuring Activities:
- ---------------------------------
The following table summarizes our Phase 3 restructuring activities from
inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------ ---- ------
Total restructuring charges -- Phase 3 $ 26.7 $ 10.4 $4.9 $ 42.0
Cash payments (12.0) -- -- (12.0)
Non-cash charges -- (10.4) -- (10.4)
------ ------ ---- ------
Balance as of June 30, 2002 $ 14.7 $ -- $4.9 $ 19.6
====== ====== ==== ======
In connection with the Phase 3 restructuring activities, management with
the appropriate level of authority approved and committed us to plans to close 7
sites, vacate buildings at the closed sites and reduce our workforce by
approximately 1,600 employees. These sites were located in Columbus, Ohio;
Eatontown, New Jersey; San Jose, California; Sydney, Australia; Toronto,
Ontario; Torquay, United Kingdom; and Waghaeusel-Kirrlach, Germany.
Implementation of plans relative to the sites located in Torquay, United Kingdom
and Waghaeusel-Kirrlach, Germany are subject to consultation with employee
representatives under applicable laws. The operations located in the San Jose,
California site are related to our commercial laser unit and are scheduled to be
moved to a new location in Santa Rosa, California. Portions of the operations at
the Eatontown, New Jersey site are to be relocated.
A-53
Workforce Reduction:
During the fourth quarter of fiscal 2002, we recorded total charges of
$26.7 million primarily related to severance and fringe benefits associated with
the reduction of approximately 1,600 employees. Of the 1,600 terminations for
which costs have been accrued, approximately 1,100 were engaged in
manufacturing, 300 in research and development, and 200 in selling, general and
administrative functions. Approximately 1,200, 200 and 200 were located in North
America, Europe and Asia-Pacific, respectively. As of June 30, 2002,
approximately 700 employees have been terminated. We expect to complete our
Phase 3 workforce reduction by the end of the fourth quarter of fiscal 2003.
Facilities and Equipment and Lease Commitments:
During the fourth quarter of fiscal 2002, property and equipment that were
disposed of or removed from operations resulted in total charges of $10.4
million related to the Transmission and Network Components operating segment.
The property and equipment write-downs consisted primarily of leasehold
improvements, computer equipment and related software, production and
engineering equipment, and office equipment, furniture and fixtures. We expect
to complete the disposal of these assets by the end of the fourth quarter of
fiscal 2003.
During the fourth quarter of fiscal 2002, we accrued total charges of $4.9
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 real estate market conditions. We anticipate that it will take approximately
5 to 54 months to sublease the remaining various vacated properties. Amounts
related to the lease expense, net of anticipated sublease proceeds, will be paid
over the respective lease terms through fiscal 2009.
Other Charges:
- --------------
As a result of the Phase 1, 2 and 3 restructuring activities, we incurred
total other charges of $419.2 million related to the Global Realignment Program.
Details of the components of the other charges were as follows (in millions):
Years Ended June 30,
------------------
2002 2001
------ ------
Additional charges resulting from a change in
estimated useful life of property and equipment $164.7 $ 6.4
Write-down of inventories -- 173.5
Purchase commitments and other obligations (7.4) 55.6
Workforce reduction 12.3 0.2
Lease commitments 6.4 --
Moving and other costs 6.7 0.8
------ ------
Total other charges $182.7 $236.5
====== ======
During fiscal 2002 and 2001, we recorded $164.7 million and $6.4 million,
respectively, of additional charges resulting from a change in the estimated
useful life of property and equipment. Total amount recorded in fiscal 2002 was
net of $3.8 million of cash proceeds in excess of the estimated salvage value of
certain restructured assets sold through auctions. These charges include
additional depreciation from a change in the estimated useful life and the
write-downs on property and equipment that were identified for disposal but
remained in use until the date of disposal.
During fiscal 2001, we recorded inventory write-downs, purchase commitments
and other obligations of $229.1 million resulting from product consolidations
and discontinuations in connection with the Global Realignment Program. During
fiscal 2002, we recorded an adjustment of $7.4 million to the purchase
commitment accrual balance, as the actual cash payments were lower than
originally estimated.
During fiscal 2002 and 2001, we recorded workforce reduction charges of
approximately $12.3 million and $0.2 million, respectively, which included
payments for severance and fringe benefits that were not associated with
A-54
a formal plan of termination, retention bonuses and employee relocation costs.
The severance and fringe benefits charges were incurred as a result of the
reduction of approximately 750 employees, consisting of approximately 600 in
manufacturing, 50 in research and development, and 100 in selling, general and
administrative functions. Approximately 150, 100 and 500 were located in North
America, Europe and Asia-Pacific, respectively. As of June 30, 2002, all 750
employees have been terminated and severance and benefit payments to these
employees have been paid in full.
During fiscal 2002, we announced the closure of one site at Piscataway, New
Jersey. Lease commitments of $6.4 million were related primarily to exiting and
terminating building leases at this site and other continuing operations. We
estimated the cost of exiting and terminating the facility leases based on the
contractual terms of the agreements and the real estate market conditions. We
anticipate that it will take approximately 12 to 54 months to sublease the
vacated properties. Amounts related to the lease expense, net of anticipated
sublease proceeds, will be paid over the respective lease terms through fiscal
2011.
During fiscal 2002 and 2001, we incurred moving and other costs of $6.7
million and $0.8 million, respectively, related to the physical relocation of
certain facilities and equipment from buildings that we have disposed or planned
to dispose.
Other charges were recorded in our Consolidated Statements of Operations as
follows (in millions):
Years Ended June 30,
------------------
2002 2001
------ ------
Cost of sales $124.6 $220.7
Research and development 8.2 2.9
Selling, general and administrative 49.9 12.9
------ ------
Total other charges $182.7 $236.5
====== ======
As of June 30, 2002, the accrual balance related to other charges was $25.3
million, consisting primarily of purchase and lease commitments and other
obligations. The accrual balance was included in "Other current liabilities" in
our Consolidated Balance Sheet.
Recommissioning of Assets:
- --------------------------
Since the beginning of 2001, the telecommunications industry has
experienced a dramatic downturn and has remained very volatile. In April 2001,
we implemented our Global Realignment Program based on the best information
available at the time. Management with the appropriate level of authority
approved and committed us to execute the Global Realignment Program. As we
continued to execute our restructuring plans to realign our operations and
consolidate the facilities, we recommissioned certain property and equipment
that had previously been removed from operations and fully depreciated or
written down under the Global Realignment Program. These assets are being placed
back into service due to the following reasons: (i) unanticipated changes in the
industry and customer demand for certain product lines, (ii) impact of
unforeseen warranty obligations, and (iii) changes in initial estimates. The
total net book value of the recommissioned property and equipment at the time of
the write-downs was $27.7 million, of which $15.9 million was related to the
Transmission and Network Components operating segment, $10.7 million was related
to the Thin Film Products and Instrumentation operating segment and $1.1 million
was related to other operating segments. The recommissioned property and
equipment were put back into use with a carrying value of $0. Based on the dates
these assets were placed back into service, we would have incurred additional
depreciation expense of $1.5 million in fiscal 2002.
Interest and Other Income, Net:
Net interest and other income was $48.3 million in fiscal 2002, compared to
$48.5 million in fiscal 2001 and $35.3 million in fiscal 2000. The decrease in
fiscal 2002 over fiscal 2001 was primarily attributable to a decline in interest
income as a result of lower interest rates and lower average daily cash and
investment balances. However, during fiscal 2002, we changed our investment
portfolio mix of taxable and tax-exempt securities to taxable securities only,
which resulted in additional interest income.
A-55
The increase in net interest and other income in fiscal 2001 over fiscal
2000 was the result of higher average daily cash and investment balances
obtained through cash generated from operating activities, proceeds from sale of
Nortel common stock, our acquisition of E-TEK at the end of fiscal 2000 and
proceeds from the issuance of common stock under our stock option and stock
purchase plans.
Gain on Sale of Subsidiaries:
In fiscal 2002, we sold 80.1% of our ownership in Iridian to IST Holdings
for $1.1 million in cash, and retained the remaining 19.9%. After adjusting for
the net costs of the assets sold and the expenses associated with the
divestiture, we realized a gain of $0.1 million from the transaction.
In fiscal 2001, we completed the sale of our Zurich, Switzerland subsidiary
to 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 the expenses
associated with the divestiture, we realized a gain of $1,770.2 million from the
transaction.
Gain (Loss) on Sale of Investments:
In fiscal 2002, we recognized total gains of $15.0 million primarily from
sales of certain non-marketable equity securities and fixed income securities.
In fiscal 2001, we sold 41.0 million shares of Nortel common stock for total
proceeds of $659.2 million, resulting in a realized loss of $559.1 million.
Reduction in Fair Value of Investments:
In fiscal 2002, we recorded $225.8 million of other-than-temporary
reductions in fair value of our available-for-sale and non-marketable
investments, compared to $522.1 million in fiscal 2001. When the carrying value
of an investment exceeds the fair value and the decline in fair value is deemed
to be other-than-temporary, we write down the value of the investment to its
fair value. The write-downs in fiscal 2002 consisted of $187.3 million related
to our investment in Nortel common stock, $9.6 million related to other
available-for-sale investments and $28.9 million related to non-marketable
equity securities. The write-downs in fiscal 2001 consisted of $511.8 million
related to our investment in Nortel common stock and $10.3 million related to
other available-for-sale investments.
Should the fair value of our investments continue to decline in the future,
we may be required to record additional charges if the decline is determined to
be other-than-temporary.
Loss on Equity Method Investments, Net:
In fiscal 2002, we recorded charges of $54.6 million related to our equity
method investments, compared to $883.9 million in fiscal 2001. The charges
consisted of: (i) $40.0 million in fiscal 2002 related to our pro rata share of
net losses in ADVA and other equity method investments, compared to a pro rata
share of net losses of $3.0 million in fiscal 2001; (ii) $13.9 million in fiscal
2002 related to a charge to write down the carrying value of our investment in
ADVA due to an other-than-temporary decline in its market value, compared to
$744.7 million in fiscal 2001; and (iii) $0.7 million of amortization expense in
fiscal 2002 related to the difference between the cost of the investment and the
underlying equity in the net assets of ADVA, compared to $136.2 million in
fiscal 2001.
The carrying value of our investment in ADVA was reduced to $0 in the
second quarter of fiscal 2002, and no further pro rata share of ADVA's net
losses was recorded thereafter as we had no commitment to provide additional
funding to ADVA. Should ADVA report net income in future periods, we will resume
applying the equity method after our pro rata share of ADVA's net income exceeds
our pro rata share of ADVA's net losses not recognized during the periods the
equity method was suspended.
Income Tax Expense (Benefit):
We recorded $237.3 million of income tax expense in fiscal 2002, $371.9
million of income tax benefit in fiscal 2001 and $74.9 million of income tax
expense in fiscal 2000. The expected tax benefit derived by applying the federal
statutory rate to the operating loss in fiscal 2002 differed from the income tax
expense recorded primarily
A-56
due to non-deductible acquisition-related charges, increases to our valuation
allowance for deferred tax assets and reductions in our deferred tax assets
recorded in prior years attributable to assumed employee stock options that have
been cancelled or exercised when the share value on the option exercise dates
was less than the value recorded for purchase accounting purposes. The expected
tax benefit derived by applying the federal statutory rate to our operating
losses in fiscal 2001 and 2000 differed from the income tax provision recorded
primarily due to non-deductible acquisition-related charges and increases to our
valuation allowance for deferred tax assets.
At June 30, 2002, our valuation allowance for deferred tax assets was
$2,270.3 million. Our valuation allowance reduced our net deferred tax assets as
of June 30, 2002 to $68.0 million, an amount representing foreign income taxes
recoverable from prior years. Approximately $22.3 million of our valuation
allowance for deferred tax was attributable to acquisition-related items that if
and when realized in future periods, will first reduce unamortized goodwill,
then other non-current intangible assets of acquired subsidiaries, and then
income tax expense. Approximately $473.0 million of our valuation allowance for
deferred tax assets was attributable to stock option deductions, the benefit of
which will be credited to additional paid-in capital when realized.
During fiscal 2002, the Company received $34.9 million of federal income
tax refunds as a result of the enactment of the Job Creation and Worker
Assistance Act of 2002. The legislative change that was signed by President Bush
on March 9, 2002 extended the federal net operating loss carryback period from 2
to 5 years for net operating losses sustained by us in fiscal 2002 and 2001.
Approximately $23.0 million of the federal income tax refunds received were
attributable to stock options, the benefit of which has been recorded to
additional paid-in capital.
Operating Segment Information:
Transmission and Network Components. Net sales for the Transmission and
Network Components operating segment were $767.5 million in fiscal 2002, a
decrease of $1,902.8 million, or 71%, from fiscal 2001. The decline in net sales
was primarily due to lower demand for our telecommunications products and lower
average selling price caused by the downturn in the telecommunications industry,
which resulted in a decrease in network deployment and capital spending by
telecommunications carriers. Operating loss as a percentage of net sales was
114% in fiscal 2002, as compared to an operating income of 9% of net sales in
fiscal 2001. The decrease was primarily due to a significant decline in sales
coupled with lower average selling prices, a higher fixed cost base as a
percentage of net sales, charges associated with the implementation of our
Global Realignment Program, and inventory write-downs.
Thin Film Products and Instrumentation. Net sales for the Thin Film
Products and Instrumentation operating segment were $323.9 million in fiscal
2002, a decrease of $236.8 million, or 42%, from fiscal 2001. The decrease in
our net sales in fiscal 2002 was primarily due to lower demand for our
instrumentation products, commercial laser products and thin film products for
telecommunications markets as a result of the industry downturn. However, we saw
sequential growth in this segment in the third and fourth quarters due to strong
demand for our thin film products for display and security markets. Operating
loss as a percentage of net sales was 1% in fiscal 2002, as compared to an
operating income of 33% of net sales in fiscal 2001. The decrease was primarily
due to a significant decline in sales coupled with lower average selling prices,
a higher fixed cost base as a percentage of net sales, charges associated with
the implementation of our Global Realignment Program, and inventory write-downs.
Liquidity and Capital Resources
We had a combined balance of cash, cash equivalents and short-term
investments of $1,450.4 million at June 30, 2002. Our total debt outstanding was
$2.9 million at June 30, 2002.
Operating activities generated $85.7 million in cash during fiscal 2002,
primarily resulting from our net loss adjusted for: (i) non-cash accounting
charges for depreciation and amortization, stock-based compensation, write-off
of acquired in-process research and development, loss on disposal of property
and equipment, reduction of goodwill and other long-lived assets, non-cash
restructuring costs associated with our Global Realignment Program, reduction in
the fair value of investments and loss on equity method investments; (ii) a
decrease in accounts receivable and inventories; and (iii) a decrease in net
deferred income taxes. These items were partially offset by
A-57
gains on sale of investments, which were accounted for as an investing activity,
and a decrease in our accounts payable and other liabilities. Our operating cash
flows were favorably affected by $121.8 million in tax refunds received in
fiscal 2002.
Accounts receivable were lower in fiscal 2002 due to a decline in net sales
and improved collections. Days sales outstanding in accounts receivable declined
to 55 days at June 30, 2002 from 72 days at June 30, 2001. Inventory levels were
lower primarily as a result of lower purchase and production volumes and
write-downs of excess and obsolete inventories.
Net deferred income taxes decreased in fiscal 2002 primarily due to
write-offs of deferred tax assets recorded in prior business combinations
relating to assumed employee stock options that either expired unexercised or
were exercised during the quarter when the market value of the underlying stock
was less than the previously recorded value at the business combination date,
and increases in the valuation allowance for domestic deferred tax assets
recorded in prior periods due to reductions in our forecasts of future domestic
taxable income.
Cash used by investing activities was $472.7 million in fiscal 2002,
primarily resulting from the following: (i) $181.7 million used for the
purchases of available-for-sale and other investments, net of sales; (ii) $176.9
million used for the acquisition of businesses, net of cash acquired; and (iii)
capital expenditures of $132.5 million. We expect to incur capital spending of
approximately $70.0 million to $100.0 million in fiscal 2003.
Our investments of surplus cash in money market instruments are made in
accordance with an investment policy approved by our Board of Directors. In
general, our investment policy requires that securities purchased and held be
rated A1/P1, MIG-1, AA-/Aa3 or better. No securities may have an initial
maturity that exceeds 36 months, and the average duration of our investment
portfolio may not exceed 18 months. At any time, no more than 25% of the
investment portfolio may be concentrated in a single issuer other than the U.S.
government.
Our financing activities provided cash of $32.3 million in fiscal 2002. We
generated $65.1 million from the exercise of stock options and the sale of
common stock through our employee stock purchase plans, offset by the repayment
of $32.8 million in debt.
With the exception of one operating lease, we do not engage in any
off-balance sheet arrangement with unconsolidated entities or related parties.
As of June 30, 2002, we had one master lease agreement with a special purpose
entity (the "Lessor"), managed and administered by a trustee, for the
development of manufacturing, research and development and administrative
facilities in Melbourne, Florida and Raleigh, North Carolina. Under a related
credit agreement, a group of financial institutions has committed to fund the
Lessor a maximum of $59.6 million to develop the projects. As of June 30, 2002,
$42.3 million has been drawn and no further withdrawal is permitted as the
development of the projects has been completed. The lease has an initial term of
five years, which began on August 4, 2000, and we have an option to renew the
lease for two additional terms of one year each, subject to certain conditions.
At any time prior to the expiration date of the lease, we may, at our option,
purchase the properties from the Lessor for $44.6 million (the "Termination
Value"), representing the principal balance of the loan and capitalized
interest. If we elect not to purchase the properties, we may exercise our option
to sell them to a third party at market value within 180 days before the end of
the lease term. Under the sale option, we keep any sale proceeds in excess of
the Termination Value. If the sale proceeds are below the Termination Value, we
are obligated to make up the shortfall up to approximately $37.5 million.
Neither the real estate assets nor the debt associated with the development of
the projects was reflected on our Consolidated Balance Sheets. No officers or
directors have any financial interest in this lease arrangement.
As of June 30, 2002, we restricted $46.9 million of our short-term
investments as collateral for specified obligations of the Lessor under the
lease. These investment securities are restricted as to withdrawal and are
managed by third parties subject to certain limitations under our investment
policy. In addition, we must maintain a minimum consolidated tangible net worth,
as defined, of $500.0 million.
As of June 30, 2002, we had two standby letter of credit facilities
totaling $7.3 million. In addition, we had an operating bank line of credit of
$4.8 million. Advances under the line of credit bear interest at the Canadian
prime rate. As of June 30, 2002, the interest rate was 4.25% and we had no
outstanding borrowings under the line of credit.
A-58
The following table summarizes our contractual cash obligations (excluding
obligations incurred in the ordinary course of business such as accounts
payable) as of June 30, 2002, and the effect these obligations are expected to
have on our liquidity and cash flow in future periods (in millions):
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 Thereafter Total
----- ----- ----- ----- ---- ---- ------
Debt obligations $ 2.5 $ 0.1 $ 0.1 $ 0.2 $ -- $ -- $ 2.9
Capital lease obligations,
including interest expense 1.7 0.8 0.8 0.8 0.8 3.3 8.2
Operating lease obligations 37.4 27.9 22.5 62.4 12.7 27.1 190.0
Losses on purchase commitments 24.0 -- -- -- -- -- 24.0
----- ----- ----- ----- ---- ---- ------
Total $65.6 $28.8 $23.4 $63.4 $13.5 $30.4 $225.1
===== ===== ===== ===== ===== ===== ======
As of June 30, 2002, operating lease obligations of $80.8 million in
connection with our Global Realignment Program and losses on purchase
commitments of $24.0 million were accrued in our Consolidated Balance Sheet.
We expect to use approximately $250 to $300 million in cash in fiscal 2003,
exclusive of acquisitions, if any, made during the year. We believe that our
existing cash balances and investments will be sufficient to meet our liquidity
and capital spending requirements at least through the next 12 months. However,
possible investments in or acquisitions of complementary businesses, products or
technologies may require the use of additional cash or financing prior to such
time. In addition, if the current economic downturn remains protracted, we may
need to expend our cash reserves to fund our operations. Our liquidity could be
negatively affected by a continued decline in demand for our products, which are
subject to rapid technological changes, or a reduction of capital expenditures
by telecommunications carriers as a result of the economic downturn or other
factors. There can be no assurance that additional debt or equity financing
would be available if so required or, if available, could be secured on terms
satisfactory to us.
Acquired In-Process Research and Development Projects
Scion:
- ------
We performed an allocation of the total purchase price of Scion to its
individual assets. Of the total purchase price, $3.2 million has been allocated
to acquired IPR&D and was charged to expense in the fourth quarter of fiscal
2002. The remaining purchase price has been allocated specifically to
identifiable assets acquired. The identifiable intangible assets included
existing technology and core technology. The acquired IPR&D was comprised of
advanced integrated waveguide devices.
We have incurred post-acquisition costs of $0.2 million to date and
estimate that an additional investment of approximately $0.8 million in research
and development over the next 6 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 relates 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. The differences between the actual outcome noted above and the
assumptions used in the original valuation of the technology are not expected to
have a significant impact on our results of operations and financial position.
IBM's Optical Transceiver Business:
- -----------------------------------
We performed an allocation of the total purchase price of IBM's optical
transceiver business to its individual assets. Of the total purchase price,
$22.1 million has been allocated to IPR&D and was charged to expense in the
second quarter of fiscal 2002. The remaining purchase price has been allocated
specifically to identifiable assets acquired. The identifiable intangible assets
included existing technology, core technology, distribution agreements,
supply/contract manufacturing agreements, real estate license agreement and
non-competition agreement. The IPR&D was comprised of the following projects:
(i) 10 gigabit 1310nm xenpak transceivers; (ii) small form factor fiber channel
with digital optical monitoring and optical carrier; (iii) 10 gigabit 1310nm
xenpak transceivers with digital optical monitoring / fiber channel; (iv) 10
gigabit 850nm xenpak transceivers; and (v) 10 gigabit 850nm XGP.
A-59
We have incurred post-acquisition costs of $7.8 million to date and
estimate that an additional investment of approximately $2.8 million in research
and development over the next 9 months will be required to complete the IPR&D.
Due to the uncertainty of market conditions, the 10 gigabit 1310nm xenpak
transceivers with digital optical monitoring / fiber channel project has been
put on hold, and the 10 gigabit 850nm xenpak transceivers and the 10 gigabit
850nm XGP projects were terminated as of June 30, 2002. The nature of the
efforts required to develop the IPR&D into commercially viable products
principally relates 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. The differences
between the actual outcome noted above and the assumptions used in the original
valuation of the technology are not expected to have a significant impact our
results of operations and financial position.
Other 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 acquisitions during the past three years is as follows:
SDL:
- ----
The products under development at the time of acquisition included: (i)
pump laser chips; (ii) pump laser modules; (iii) Raman chips and amplifiers;
(iv) external modulators and drivers; and (v) industrial laser products. The
pump laser chips, industrial laser and Raman amplifier products have been
completed at a cost consistent with our expectations. The external modulators
and driver projects have been terminated at SDL and transferred to another
division within the Company. The pump laser modules and Raman pumps are expected
to be completed by the second quarter of fiscal 2003. We have incurred
post-acquisition costs of $36.5 million through the end of fiscal 2002 with
estimated costs to complete of $0.5 million. The differences between the actual
outcome noted above and the assumptions used in the original valuation of the
technology are not expected to have a significant impact on 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. We have incurred
post-acquisition costs of $4.2 million to date and estimate that a total
investment of approximately $2.7 million in research and development over the
next 12 months will be required to complete the IPR&D. The nature of the efforts
required to develop the IPR&D into commercially viable products principally
relates 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. The differences between the actual outcome
noted above and the assumptions used in the original valuation of the technology
are not expected to have a significant impact on our results of operations and
financial position.
E-TEK:
- ------
The products under development at the time of acquisition included: (i)
wavelength division multiplexers; (ii) submarine products; and (iii) other
component products and modules. The wavelength division multiplexers and
submarine products have been completed at a cost consistent with our
expectations. Our projects for other components and modules included the
development of attenuators, circulators, switches, dispersion equalization
monitors and optical performance monitors. Our development efforts were
completed at post-acquisition costs of $7.7 million. The differences between the
actual outcome noted above and the assumptions used in the original valuation of
the technology have not significantly affected our results of operations and
financial position.
A-60
OCLI:
- -----
The products under development at the time of the acquisition included: (i)
thin film filters and switches; (ii) optical display and projection products;
and (iii) light interference pigments. Thin film filters include switches and
dispersion compensators. The MEMS 2x2 Switch development has been terminated at
OCLI and transferred to another division within the Company. Thin film
dispersion compensator research has been cancelled. We incurred post-acquisition
costs of approximately $4.9 million. 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 were completed
in the third quarter of fiscal 2002. We have incurred post-acquisition research
and development expenses of approximately $16.6 million. The differences between
the actual outcome noted above and the assumptions used in the original
valuation of the technology have not significantly affected our results of
operations and financial position.
SIFAM:
- ------
The products under development at the time of the acquisition included: (i)
miniature couplers; (ii) combined components; and (iii) micro-optic devices.
Miniature coupler development and combined components development were completed
at a cost consistent with our expectations. Micro-optic device development was
evaluated relative to similar efforts already underway within our organization.
In the light of this evaluation, we decided to discontinue development in this
area. The costs incurred post acquisition for micro-optic device development
have been consistent with our expectations.
EPITAXX:
- --------
The products under development at the time of the acquisition included: (i)
high-speed receivers; and (ii) an optical spectrum analyzer product. The
high-speed receivers and optical spectrum analyzers have been completed at costs
consistent with our expectations.
A-61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investments
We maintain an investment portfolio in a variety of financial instruments,
including fixed and floating rate bonds, municipal bonds, auction instruments,
money market instruments, corporate bonds and agency bonds. Part of our
investment portfolio also includes minority equity investments in several
publicly traded companies, the values of which are subject to market price
volatility. These investments are generally classified as available-for-sale
and, consequently, are recorded on our balance sheets at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity.
Investments in both fixed-rate and floating-rate interest earning
instruments carry a degree of interest rate risk. The fair market values of our
fixed-rate securities decline if interest rates rise, while floating-rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may be less than
expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities that have experienced a decline in market
value because of changes in interest rates.
The following tables present the hypothetical changes in fair value in the
financial instruments held at June 30, 2002 and June 30, 2001 that are sensitive
to changes in interest rates. These instruments are not leveraged or hedged 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 June 30, 2002 and June 30, 2001. The following tables
estimate the fair value of the portfolio at a 12-month horizon (in millions):
Valuation of Securities Fair Value Valuation of Securities
Given an Interest Rate as of Given an Interest Rate
Decrease of X Basis Points June 30, 2002 Increase of X Basis Points
------------------------ ------ -------------------------
150 BPS 100 BPS 50 BPS 50 BPS 100 BPS 150 BPS
------ ------ ------ ------ ------ ------
U.S. Treasuries and agencies notes $ 405 $ 404 $ 403 $ 402 $ 401 $ 400 $ 399
State, municipal and county
government notes and bonds 365 364 363 362 361 360 359
Corporate bonds and commercial
paper 234 234 233 233 232 231 231
Money market funds 168 168 168 168 168 168 168
------ ------ ------ ------ ------ ------ ------
Total $1,172 $1,170 $1,167 $1,165 $1,162 $1,159 $1,157
====== ====== ====== ====== ====== ====== ======
Valuation of Securities Fair Value Valuation of Securities
Given an Interest Rate as of Given an Interest Rate
Decrease of X Basis Points June 30, 2002 Increase of X Basis Points
------------------------ ------ -------------------------
150 BPS 100 BPS 50 BPS 50 BPS 100 BPS 150 BPS
------ ------ ------ ------ ------ ------
U.S. Treasuries and 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 bonds and commercial
paper 68 67 67 67 66 66 65
Money market funds 732 732 732 732 732 732 732
------ ------ ------ ------ ------ ------ ------
Total $1,555 $1,550 $1,547 $1,544 $1,540 $1,537 $1,532
====== ====== ====== ====== ====== ====== ======
A-62
The following analyses present the hypothetical changes in fair values of
equity investments in publicly traded companies 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%, 35% and 50% were selected. The
following tables estimate the fair value of the publicly traded corporate
equities at a 12-month horizon (in millions):
Valuation of Securities Fair Value Valuation of Securities
Given X% Decrease as of Given X% Increase
in Each Stock's Price June 30, 2002 In Each Stock's Price
--------------------------- --------------- ---------------------------
50% 35% 15% 15% 35% 50%
------- ------- ------- ------- ------- -------
Corporate equities $20 $27 $35 $41 $47 $55 $61
Valuation of Securities Fair Value Valuation of Securities
Given X% Decrease as of Given X% Increase
in Each Stock's Price June 30, 2001 In Each Stock's Price
------------------------------ --------------- ------------------------------
50% 35% 15% 15% 35% 50%
-------- -------- -------- -------- -------- --------
Corporate equities $139 $181 $236 $278 $320 $375 $417
Foreign Exchange Forward Contracts
Our international business is subject to normal international business
risks 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 affected by changes in these or other factors.
We generate a portion of our sales from sales to customers located outside
the United States and from sales by our foreign subsidiaries to U.S. customers.
International sales are typically denominated in either U.S dollars or the local
currency of each country. Our foreign subsidiaries incur most of their expenses
in the local currency, and therefore, they use the local currency as their
functional currency.
We enter into foreign exchange forward contracts on behalf of our
Australian, Canadian and European subsidiaries. These forward contracts offset
the impact of U.S. dollar currency fluctuations on certain assets and
liabilities.
The foreign exchange forward contracts we enter into have original
maturities less than 40 days. 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.
A-63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of JDS Uniphase Corporation
We have audited the accompanying consolidated balance sheets of JDS
Uniphase Corporation as of June 30, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2002. 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 audits 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 as of June 30, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2002, 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
July 23, 2002
A-64
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share data)
Years Ended June 30,
-----------------------------------
2002 2001 2000
--------- ---------- --------
Net sales $ 1,098.2 $ 3,232.8 $1,430.4
Cost of sales 1,171.1 2,306.7 751.6
--------- ---------- --------
Gross profit (loss) (72.9) 926.1 678.8
Operating expenses:
Research and development 254.8 325.9 113.4
Selling, general and administrative 382.9 818.1 172.9
Amortization of purchased intangibles 1,308.7 5,387.0 896.9
Acquired in-process research and development 25.3 393.2 360.7
Reduction of goodwill and other long-lived assets 5,979.4 50,085.0 --
Restructuring charges 260.0 264.3 --
--------- ---------- --------
Total operating expenses 8,211.1 57,273.5 1,543.9
--------- ---------- --------
Loss from operations (8,284.0) (56,347.4) (865.1)
Interest and other income, net 48.3 48.5 35.3
Gain on sale of subsidiaries 0.1 1,770.2 --
Gain (loss) on sale of investments 15.0 (559.1) --
Reduction in fair value of investments (225.8) (522.1) --
Loss on equity method investments, net (54.6) (883.9) --
--------- ---------- --------
Loss before income taxes (8,501.0) (56,493.8) (829.8)
Income tax expense (benefit) 237.3 (371.9) 74.9
--------- ---------- --------
Net loss $(8,738.3) $(56,121.9) $ (904.7)
========= ========== ========
Net loss per share -- basic and diluted $ (6.50) $ (51.40) $ (1.27)
========= ========== ========
Shares used in per-share calculation -- basic and diluted 1,344.3 1,091.9 710.9
========= ========== ========
See accompanying notes to consolidated financial statements.
A-65
JDS UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par-value data)
June 30,
------------------------
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 412.4 $ 762.8
Short-term investments 1,038.0 1,049.4
Accounts receivable, less allowance for doubtful accounts of
$42.9 at June 30, 2002 and $40.3 at June 30, 2001 134.4 477.6
Inventories 110.0 287.6
Refundable income taxes 60.4 31.2
Deferred income taxes 68.0 340.2
Other current assets 34.1 87.5
---------- ----------
Total current assets 1,857.3 3,036.3
Property, plant and equipment, net 491.5 1,173.0
Deferred income taxes 43.9 806.3
Goodwill and other intangible assets, net 509.7 7,045.6
Long-term investments 95.6 169.0
Other assets 6.5 15.2
---------- ----------
Total assets $ 3,004.5 $ 12,245.4
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66.2 $ 190.6
Accrued payroll and related expenses 70.2 133.0
Income taxes payable 31.3 30.6
Deferred income taxes 2.2 63.0
Restructuring accrual 95.8 105.2
Warranty accrual 73.6 49.7
Capital lease obligations 1.3 1.2
Other current liabilities 141.9 275.2
---------- ----------
Total current liabilities 482.5 848.5
Deferred income taxes 41.7 672.4
Capital lease obligations, less current portion 5.5 --
Other non-current liabilities 3.4 18.0
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, 2002 and 2001 -- --
Series B: 100,000 shares authorized at June 30, 2002 and 2001 -- --
Special voting share: 1 share authorized, issued and outstanding -- --
Common stock, $0.001 par value:
Authorized shares: 3,000,000,000
Issued and outstanding shares:
1,370,482,388 at June 30, 2002 and 1,318,246,161 at June 30, 2001 1.4 1.3
Common stock to be issued 111.7 90.8
Additional paid-in capital 68,399.0 68,046.8
Deferred compensation (54.2) (183.6)
Accumulated deficit (65,962.7) (57,224.4)
Accumulated other comprehensive loss (23.8) (24.4)
---------- ----------
Total stockholders' equity 2,471.4 10,706.5
---------- ----------
Total liabilities and stockholders' equity $ 3,004.5 $ 12,245.4
========== ==========
See accompanying notes to consolidated financial statements.
A-66
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended June 30,
----------------------------------------
2002 2001 2000
--------- ---------- ---------
OPERATING ACTIVITIES:
Net loss $(8,738.3) $(56,121.9) $ (904.7)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense 336.6 155.4 52.3
Amortization expense 1,308.7 5,387.0 898.4
Amortization of deferred compensation and other stock-based compensation expense 124.9 52.6 0.5
Acquired in-process research and development 25.3 393.2 360.7
Reduction of goodwill and other long-lived assets 5,979.4 50,085.0 --
Gain on sale of subsidiaries (0.1) (1,770.2) --
(Gain) loss on sale of investments (15.0) 559.1 --
Reduction in fair value of investments 225.8 522.1 --
Loss on equity method investments 54.6 883.9 --
Loss on disposal of property and equipment 19.5 -- --
Noncash restructuring charges 148.3 133.3 --
Tax benefit on non-qualified stock options 23.0 142.7 47.8
Change in deferred income taxes, net 340.8 (598.3) (78.9)
Changes in operating assets and liabilities:
Accounts receivable 343.7 (21.0) (132.9)
Inventories 194.3 190.3 (94.7)
Other current assets (9.3) (92.4) 5.5
Income taxes payable 0.7 (31.3) 18.6
Accounts payable and other liabilities (277.2) 183.7 108.5
--------- ---------- ---------
Net cash provided by operating activities 85.7 53.2 281.1
--------- ---------- ---------
INVESTING ACTIVITIES:
Purchases of available-for-sale investments (3,971.4) (1,523.7) (2,395.9)
Purchases of other investments (46.8) (70.3) --
Sales of available-for-sale investments 3,798.5 2,164.4 1,757.3
Sales of other investments 38.0 -- --
Acquisitions of businesses, net of cash acquired (176.9) 175.7 99.9
Purchase of property, plant and equipment and licenses (132.5) (735.3) (275.3)
Proceeds from sale of property and equipment 9.8 -- --
Other assets, net 8.6 (14.1) (0.9)
--------- ---------- ---------
Net cash used in investing activities (472.7) (3.3) (814.9)
--------- ---------- ---------
FINANCING ACTIVITIES:
Repayment of debt acquired (32.8) (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 65.1 417.7 113.7
--------- ---------- ---------
Net cash provided by financing activities 32.3 391.1 782.1
--------- ---------- ---------
Effect of exchange rates on cash and cash equivalents 4.3 2.8 (4.7)
Increase (decrease) in cash and cash equivalents (350.4) 443.8 243.6
Cash and cash equivalents at beginning of period 762.8 319.0 75.4
--------- ---------- ---------
Cash and cash equivalents at end of period $ 412.4 $ 762.8 $ 319.0
========= ========== =========
Supplemental disclosure of cash flow information:
Net cash provided by operating activities excluding indirect acquisition costs paid
to certain SDL executives $ 85.7 $ 354.1 $ 281.1
Cash paid for interest 1.9 1.7 3.4
Cash paid for taxes 20.3 174.0 73.0
Cash received for tax refunds 121.8 20.0 5.1
Non-cash transactions:
Proceeds from sale of subsidiary $ -- $ 1,953.3 $ --
Common stock issued in connection with acquisitions 274.2 41,446.2 21,234.5
Common stock issued in connection with litigation settlement 2.3 -- --
Common stock to be issued in connection with the acquisition of UNL 20.9 90.8 --
See accompanying notes to consolidated financial statements.
A-67
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Common
Preferred Stock Common Stock Stock
----------------- ------------------- to be
Shares Amount Shares Amount Issued
-------- -------- ---------- -------- -----------
Balance at June 30, 1999 0.1 $-- 643.7 $ 0.6 $ --
Shares issued under employee stock
plans and related tax benefits -- -- 36.6 -- --
Common stock issued in connection with:
offerings -- -- 35.8 0.1 --
acquisitions, net of issuance costs -- -- 219.8 0.2 --
Amortization of deferred compensation -- -- -- -- --
Conversion of Chassis debt -- -- -- -- --
Net loss -- -- -- -- --
Change in net unrealized losses on
available-for-sale investments -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
--- --- ------- ------ -------
Balance at June 30, 2000 0.1 -- 935.9 0.9 --
Shares issued under employee stock
plans and related tax benefits -- -- 43.4 0.1 --
Common stock issued in connection with
acquisitions, net of issuance costs -- -- 338.9 0.3 --
Common stock to be issued -- -- -- -- 90.8
Payments on stockholders'
note receivable -- -- -- -- --
Compensation expense related
to stock options -- -- -- -- --
Modification of stock options in
connection with the sale of subsidiary -- -- -- -- --
Deferred stock-based compensation
related to acquisitions -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Conversion of Ramar debt -- -- 0.1 -- --
Net loss -- -- -- -- --
Change in net unrealized gains on
available-for-sale investments -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
--- --- ------- ------ -------
Balance at June 30, 2001 0.1 -- 1,318.3 1.3 90.8
Shares issued under employee stock
plans and related tax benefits -- -- 15.9 -- --
Common stock issued in connection with:
acquisitions, net of issuance costs -- -- 36.0 0.1 --
litigation settlement -- -- 0.3 -- --
Common stock to be issued -- -- -- -- 20.9
Payments on stockholders'
note receivable -- -- -- -- --
Deferred stock-based compensation
related to acquisition -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Reversal of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
Change in net unrealized gains on
available-for-sale investments -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
--- --- ------- ------ -------
Balance at June 30, 2002 0.1 $-- 1,370.5 $ 1.4 $ 111.7
=== === ======= ====== ========
Accumulated
Additional Other
Paid-In Deferred Accumulated Comprehensive
Capital Compensation Deficit Loss Total
------------ -------------- --------------- -------------- -------------
Balance at June 30, 1999 $ 3,825.3 $ (3.1) $ (197.8) $ (5.7) $ 3,619.3
Shares issued under employee stock
plans and related tax benefits 149.5 -- -- -- 149.5
Common stock issued in connection with:
offerings 713.5 -- -- -- 713.6
acquisitions, net of issuance costs 21,211.4 -- -- -- 21,211.6
Amortization of deferred compensation -- 0.5 -- -- 0.5
Conversion of Chassis debt 0.3 -- -- -- 0.3
Net loss -- -- (904.7) -- (904.7)
Change in net unrealized losses on
available-for-sale investments -- -- -- (1.8) (1.8)
Foreign currency translation adjustment -- -- -- (9.7) (9.7)
----------
Comprehensive loss -- -- -- -- (916.2)
--------- ------- ---------- ------ ----------
Balance at June 30, 2000 25,900.0 (2.6) (1,102.5) (17.2) 24,778.6
Shares issued under employee stock
plans and related tax benefits 552.4 -- -- -- 552.5
Common stock issued in connection with
acquisitions, net of issuance costs 41,512.7 -- -- -- 41,513.0
Common stock to be issued -- -- -- -- 90.8
Payments on stockholders'
note receivable 8.1 -- -- -- 8.1
Compensation expense related
to stock options 11.1 -- -- -- 11.1
Modification of stock options in
connection with the sale of subsidiary 61.2 -- -- -- 61.2
Deferred stock-based compensation
related to acquisitions -- (233.6) -- -- (233.6)
Amortization of deferred compensation -- 52.6 -- -- 52.6
Conversion of Ramar debt 1.3 -- -- -- 1.3
Net loss -- -- (56,121.9) -- (56,121.9)
Change in net unrealized gains on
available-for-sale investments -- -- -- 7.7 7.7
Foreign currency translation adjustment -- -- -- (14.9) (14.9)
----------
Comprehensive loss -- -- -- -- (56,129.1)
--------- ------- ---------- ------ ----------
Balance at June 30, 2001 68,046.8 (183.6) (57,224.4) (24.4) 10,706.5
Shares issued under employee stock
plans and related tax benefits 85.9 -- -- -- 85.9
Common stock issued in connection with:
acquisitions, net of issuance costs 274.2 -- -- -- 274.3
litigation settlement 2.3 -- -- -- 2.3
Common stock to be issued -- -- -- -- 20.9
Payments on stockholders'
note receivable 1.8 -- -- -- 1.8
Deferred stock-based compensation
related to acquisition -- (0.5) -- -- (0.5)
Amortization of deferred compensation -- 117.9 -- -- 117.9
Reversal of deferred compensation (12.0) 12.0 -- -- --
Net loss -- -- (8,738.3) -- (8,738.3)
Change in net unrealized gains on
available-for-sale investments -- -- -- (2.5) (2.5)
Foreign currency translation adjustment -- -- -- 3.1 3.1
----------
Comprehensive loss -- -- -- -- (8,737.7)
--------- ------- ---------- ------ ----------
Balance at June 30, 2002 $68,399.0 $ (54.2) $(65,962.7) $(23.8) $ 2,471.4
========= ======= ========== ====== ==========
See accompanying notes to consolidated financial statements.
A-68
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business:
- ------------------------
JDS Uniphase Corporation (the "Company") is a worldwide leader in optical
technology. The Company designs and manufactures products for fiberoptic
communications, as well as for markets where its core optics technologies
provide innovative solutions for industrial, commercial and consumer
applications. The Company's fiberoptic components and modules are deployed by
system manufacturers for the telecommunications, data communications and cable
television industries. The Company also offers products for display, security,
medical/ environmental instrumentation, decorative, aerospace and defense
applications.
The Company was incorporated in California in May 1979 and reincorporated
in Delaware in October 1993. The Company is the product of several significant
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. During fiscal 2002, the Company
acquired IBM's optical transceiver business on December 28, 2001.
Fiscal Years:
- -------------
In fiscal 2001, the Company changed its year-end from a fiscal year ending
on June 30 to a 52-week fiscal 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 fiscal 2001.
The Company's fiscal 2002 ended on June 29, 2002, whereas fiscal 2001 and
2000 ended on June 30, 2001 and 2000, respectively. For comparative presentation
purposes, all accompanying consolidated financial statements and notes thereto
have been shown as ending on June 30.
Principles of Consolidation:
- ----------------------------
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and included the
Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
Reclassification:
- -----------------
The following amounts reported in prior years have been reclassified to
conform to the current year presentation:
Consolidated Balance Sheets:
o Warranty accrual of $49.7 million as of June 30, 2001 is shown as a
separate line item in the current year presentation.
o Short-term capital lease obligations of $1.2 million as of June 30, 2001
are shown as a separate line item in the current year presentation.
o Long-term debt of $12.8 million as of June 30, 2001 is included in "Other
non-current liabilities" in the current year presentation.
A-69
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Consolidated Statements of Cash Flows:
o Refundable income taxes of $23.1 million in fiscal 2001 are included in
"Other current assets" under "Changes in operating assets and liabilities"
in the current year presentation.
o Effect of exchange rates on cash and cash equivalents of $2.8 million in
fiscal 2001 and negative $4.7 million in fiscal 2000 is shown as a
separate line item in the current year presentation.
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 accompanying
consolidated financial statements and notes thereto. Actual results could differ
from those estimates and such differences could be material to the financial
statements.
Cash and Cash Equivalents:
- --------------------------
The Company considers treasury bills, commercial paper and money market
instruments and funds with original maturities of 90 days or less at the time of
purchase to be cash equivalents.
Investments:
- ------------
The Company's investments in all debt securities and marketable equity
securities are classified as available-for-sale investments and are recorded at
fair value. 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 also has certain minority investments in
privately held companies. These investments are generally carried at cost and
are classified as long-term investments.
The Company accounts for investments in joint ventures, limited liability
partnerships and other investments in 50% 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 impairment. In the
event the carrying value of an investment exceeds its fair value and the decline
in fair value is determined to be other-than-temporary, the Company writes down
the value of the investment to its fair value. The Company generally believes an
other-than-temporary decline occurs when the fair value of an investment is
below the carrying value for two full consecutive quarters.
Fair Value of Financial Instruments:
- ------------------------------------
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
accrued compensation and other accrued liabilities, approximate fair value
because of their short maturities. Fair value for investments in public
companies is determined using quoted market prices for those securities. Fair
value for investments in privately held companies is estimated based upon one or
more of the following: assessment of the investees' historical and forecasted
financial condition, operating results and cash flows, the values of recent
rounds of financing, or quoted market prices of comparable public companies.
A-70
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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: 5 to 40 years for building and improvements, 2 to 10 years for machinery
and equipment, and 2 to 5 years for furniture, fixtures and office equipment.
Leasehold 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.
The Company capitalizes certain costs related to the purchase and
implementation of its Enterprise Resource Planning ("ERP") software. During
fiscal 2002, the Company changed its policy on the amortization period of the
capitalized costs from 5 years to 7 years to reflect the change in expected
useful lives of such assets. The change in the amortization period resulted in a
decrease in depreciation expense of approximately $2.3 million during fiscal
2002.
Goodwill and Other Intangible Assets:
- -------------------------------------
Intangible assets consist of licenses and intellectual property acquired,
goodwill and purchased intangible assets. Purchased intangible assets primarily
include existing and core technology, trademarks and trade names, assembled
workforce and customer base. Goodwill represents the excess acquisition cost
over the fair value of tangible and identified intangible net assets acquired.
Intangible assets are amortized using the straight-line method over estimated
useful lives ranging from 1 to 15 years.
Valuation of Long-Lived Assets:
- -------------------------------
The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Such events or changes in circumstances
include, but not limited to, a significant industry downturn, a significant
decline in the market value of the Company, or significant reductions in
projected future cash flows of the operating segments. Determination of
recoverability is based on the sum of the undiscounted cash flows expected to
result from the use of the assets and their eventual disposition. An impairment
loss is measured as the amount by which the carrying amount of the assets
exceeds the fair value. Long-lived assets classified as held for sale are
measured at the lower of carrying amount or fair value less cost to sell.
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 primarily in money market funds, agency bonds,
corporate bonds, auction instruments and municipal bonds. The Company has
established guidelines relative to credit ratings, diversification and
maturities that seek to maintain safety and liquidity.
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 and
financial condition. Although such losses have been within management's
expectations to date, there can be no assurance that such allowances will
continue to be adequate given the significant increase in write-
A-71
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
offs in fiscal 2002. The Company does not require collateral from its customers.
At June 30, 2002, Lucent Technologies ("Lucent") accounted for 12% of the
Company's gross accounts receivable. At June 30, 2001, Alcatel, Nortel Networks
("Nortel") and Ciena accounted for 21%, 10% and 10%, respectively, of the
Company's gross accounts receivable.
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 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 generally 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, the Company may have excess or shortfalls of some
materials and components as well as excess inventory purchase commitments. The
Company could experience reduced or delayed product shipments or incur
additional inventory write-downs and cancellation charges or penalties, which
would increase costs and could have a material adverse impact on the Company's
results of operations.
Foreign Currency Translation and Exchange Contracts:
- ----------------------------------------------------
The Company recognizes all derivatives on the balance sheets at fair value.
Derivatives that are not hedges are 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 Company's objectives and strategies for holding derivatives are to
minimize the transaction and translation risks associated with non-functional
currency transactions. The Company does not use derivatives for trading
purposes.
The Company conducts its business and sells its products directly to
customers in North America, Europe and the rest of world. In the normal course
of business, the Company's financial position is routinely subject to market
risks associated with foreign currency rate fluctuations due to balance sheet
positions in other local foreign currencies. The Company's policy is to ensure
that business exposures to foreign exchange risks are identified, measured and
minimized using foreign currency forward contracts to reduce such risks. The
foreign currency forward contracts generally expire within 40 days. The change
in fair value of these foreign currency forward contracts is recorded as
income/loss in the Company's Consolidated Statements of Operations as a
component of interest and other income. At June 30, 2002, the face value of
these foreign currency forward contracts was $66.1 million and the change in
fair value of such contracts was not material to the Company's financial
statements.
Revenue Recognition:
- --------------------
The Company recognizes revenue when persuasive evidence of a final
agreement exists, delivery has occurred, the selling price is fixed or
determinable and collectibility is reasonably assured. Revenue recognition on
the shipment of evaluation units is deferred until customer acceptance. Revenue
from sales to distributors with rights
A-72
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
of return, price protection or stock rotation is not recognized until the
products are sold through to end customers. Generally, revenue associated with
contract cancellation payments from customers is not recognized until the
Company receives payment for such charges. The Company records provisions
against its gross revenue for estimated product returns and allowances in the
period when the related revenue is recorded.
Shipping and Handling Costs:
- ----------------------------
The Company records costs related to shipping and handling in cost of sales
for all periods presented.
Advertising Expense:
- --------------------
The Company expenses advertising costs as incurred. Advertising costs
totaled $1.4 million in fiscal 2002, $4.0 million in fiscal 2001 and $0.5
million in fiscal 2000.
Stock-Based Compensation:
- -------------------------
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," as interpreted by Financial Accounting Standards Board
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation." 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.
Comprehensive Loss:
- -------------------
The Company's accumulated other comprehensive loss consists of the
accumulated net unrealized gains or losses on available-for-sale investments and
foreign currency translation adjustments. The tax effect on changes in net
unrealized gains or losses was immaterial for all periods presented. At June 30,
2002 and 2001, the Company had a balance of net unrealized gains of $3.3 million
and $5.8 million, respectively, on available-for-sale investments. Additionally,
at June 30, 2002 and June 30, 2001, the Company had $27.1 million and $30.2
million, respectively, of foreign currency translation losses.
The components of comprehensive loss were as follows (in millions):
Years Ended June 30,
----------------------------------
2002 2001 2000
--------- ---------- -------
Net loss $(8,738.3) $(56,121.9) $(904.7)
Changes in net unrealized gains (losses) on
available-for-sale investments (2.5) 7.7 (1.8)
Changes in foreign currency translation:
Write-off of currency translation adjustment
related to disposal of foreign operations 0.9 -- --
Other changes 2.2 (14.9) (9.7)
--------- ---------- -------
Comprehensive loss $(8,737.7) $(56,129.1) $(916.2)
========= ========== =======
A-73
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Net Loss Per Share:
As the Company incurred net losses in fiscal 2002, 2001 and 2000, the
effect of dilutive securities totaling 48.5 million, 47.3 million and 64.4
million equivalent shares, respectively, has been excluded from the diluted net
loss per share computation as it was antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share (in millions, except per-share data):
Years Ended June 30,
--------------------------------------
2002 2001 2000
--------- ---------- -------
Numerator:
Net loss $(8,738.3) $(56,121.9) $(904.7)
========= ========== =======
Denominator:
Weighted-average number of common shares outstanding 1,344.3 1,091.9 710.9
========= ========== =======
Net loss per share -- basic and diluted $ (6.50) $ (51.40) $ (1.27)
========= ========== =======
Recent Accounting Pronouncements:
- ---------------------------------
SFAS No. 141 and SFAS No. 142: In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," which requires all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method. In addition, SFAS No. 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. Specifically, SFAS No. 141 requires
that an intangible asset may be separately recognized only if such an asset
meets the contractual-legal criterion or the separability criterion.
On July 1, 2002, in accordance with SFAS No. 141, the Company reassessed
the goodwill and intangible assets previously recorded in acquisitions prior to
July 1, 2001 and determined that as of June 30, 2002, the Company had
approximately $10.8 million of separately recognized intangible assets,
consisting of acquired assembled workforce, that did not meet the new
recognition criteria for an intangible asset to be recognized apart from
goodwill. The carrying amount of these intangible assets was reclassified to
goodwill on July 1, 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," under which goodwill and intangible assets with indefinite useful lives
are no longer amortized but will be reviewed for impairment annually, or more
frequently if certain events or changes in circumstances indicate that the
carrying value may not be recoverable. The impairment test for goodwill involves
a two-step process: step one consists of a comparison of the fair value of a
reporting unit with its carrying amount, including the goodwill allocated to
each reporting unit. If the carrying amount is in excess of the fair value, step
two requires the comparison of the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill. Any excess of
the carrying value of the reporting unit goodwill over the implied fair value of
the reporting unit goodwill will be recorded as an impairment loss. The
impairment test for intangible assets with indefinite useful lives consists of a
comparison of fair value to carrying value, with any excess of carrying value
over fair value being recorded as an impairment loss. Intangible assets with
finite useful lives will continue to be amortized over their useful lives and
will be reviewed for impairment in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Upon adoption of SFAS No. 142,
the Company is required to reassess the lives of identifiable intangible assets
and perform a first-year transitional impairment review related to the carrying
value of goodwill as of July 1, 2002. Step one of the transitional impairment
review must be completed by the end of the second quarter of fiscal 2003, and
step two, if necessary, must be completed by the end of the fourth quarter of
fiscal 2003. Any transitional impairment loss will be recognized as a cumulative
effect of a change in accounting principle in the Company's Consolidated
Statements of Operations.
A-74
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company adopted SFAS No. 142 on July 1, 2002. However, goodwill and
intangible assets with indefinite useful lives acquired after June 30, 2001 were
immediately subject to the non-amortization provision of SFAS No. 142. As such,
goodwill totaling $236.8 million associated with the Company's acquisitions of
IBM's optical transceiver business in December 2001 and Scion in April 2002 was
not amortized in fiscal 2002. The adoption of SFAS No. 142 is expected to have a
material impact on the Company's results of operations primarily because
goodwill will no longer be amortized. Application of the non-amortization
provisions will eliminate goodwill amortization of approximately $26.4 million
in fiscal 2003 related to acquisitions completed prior to July 1, 2001, assuming
there are no further impairment charges to the carrying amount of the goodwill.
In conjunction with the implementation of SFAS No. 142, the Company is
currently performing the transitional impairment review related to the carrying
value of goodwill as of July 1, 2002 and expects to complete the review by the
end of the first quarter of fiscal 2003.
A reconciliation of the reported net loss and net loss per share to the
amounts adjusted for the exclusion of amortization of: (i) goodwill from
acquisitions, (ii) equity method goodwill related to ADVA and (iii) assembled
workforce, net of the related tax effect, was as follows (in millions, except
per-share data):
Years Ended June 30,
----------------------------------
2002 2001 2000
--------- --------- -------
Reported net loss $(8,738.3) $(56,121.9) $(904.7)
Add back:
Amortization of:
Goodwill from acquisitions 937.5 4,945.9 689.1
Equity method goodwill related to ADVA 0.7 136.2 --
Assembled workforce 12.5 16.6 6.2
Income tax expense (32.1) (94.0) (22.7)
--------- --------- -------
Adjusted net loss $(7,819.7) $(51,117.2) $(232.1)
========= ========== =======
Reported net loss per share -- basic and diluted $ (6.50) $ (51.40) $ (1.27)
========= ========== =======
Adjusted net loss per share -- basic and diluted $ (5.82) $ (46.81) $ (0.33)
========= ========== =======
SFAS No. 144: In August 2001, the FASB issued SFAS No. 144, which
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and certain provisions of APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 related to: (i) the recognition and measurement of
the impairment of long-lived assets to be held and used, and (ii) the
measurement of long-lived assets to be disposed by sale. It provides more
guidance on estimating cash flows when performing recoverability tests, requires
long-lived assets to be disposed of other than by sale to be classified as held
and used until disposal, and establishes more restrictive criteria to classify
long-lived assets as held for sale. In addition, SFAS No. 144 supersedes the
accounting and reporting provisions of APB Opinion No. 30 for the disposal of a
segment of a business. However, it retains the basic provisions of APB Opinion
No. 30 to report discontinued operations separately from continuing operations
and extends the reporting of a discontinued operation to a component of an
entity.
The Company adopted SFAS No. 144 on July 1, 2002. Under SFAS No. 121,
excluding asset write-downs associated with the Global Realignment Program, the
Company recorded impairment charges of $5,979.4 million in fiscal 2002 and
$50,085.0 million in fiscal 2001. The adoption of SFAS No. 144 may have a
material impact on the Company's financial position and results of operations if
the industry and economic downturn continues to affect the Company's operations
and sales forecasts, primarily because SFAS No. 144 excludes goodwill, which may
result in certain long-lived assets being subject to impairment charges sooner
than they would have been recorded under SFAS No. 121.
SFAS No. 146: In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal
A-75
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is
the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002, but
early adoption is permitted. The Company is currently evaluating the adoption
date and the impact the adoption will have on its financial position and results
of operations.
Note 2. Balance Sheet Details
Inventories:
The components of inventories were as follows (in millions):
June 30,
------------------
2002 2001
------ ------
Finished goods $ 46.7 $ 56.1
Work in process 36.9 99.2
Raw materials and purchased parts 26.4 132.3
------ ------
Total inventories $110.0 $287.6
====== ======
During fiscal 2002 and fiscal 2001, the Company recorded write-downs of
excess and obsolete inventories of $203.9 million and $510.6 million,
respectively, and losses on purchase commitments of $15.1 million and $59.8
million, respectively. These additional charges to cost of sales were primarily
due to: (i) the significant decrease in forecasted sales and (ii) product
consolidations and discontinuations in connection with the Global Realignment
Program.
Property, Plant and Equipment, Net:
The components of property, plant and equipment were as follows (in
millions):
June 30,
--------------------
2002 2001
------ --------
Land $ 36.0 $ 36.3
Buildings and improvements 112.9 167.0
Machinery and equipment 160.1 683.9
Furniture, fixtures, software and office equipment 119.5 207.0
Leasehold improvements 9.1 106.7
Construction in progress 132.8 210.3
------ --------
570.4 1,411.2
Less: accumulated depreciation (78.9) (238.2)
------ --------
Total property, plant and equipment, net $491.5 $1,173.0
====== ========
During fiscal 2002 and 2001, the Company recorded $375.5 million and $10.2
million, respectively, of reductions in the carrying value of property, plant
and equipment as a result of impairment analyses performed in accordance with
SFAS No. 121 (see Note 8), excluding asset write-downs associated with the
Global Realignment Program.
A-76
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Goodwill and Other Intangibles, Net:
- ------------------------------------
The components of goodwill and other intangible assets were as follows (in
millions):
June 30,
----------------------
2002 2001
------- ---------
Goodwill $ 515.3 $10,985.6
Other intangible assets 460.7 2,353.6
Licenses and other intellectual property -- 4.5
------- ---------
976.0 13,343.7
Less: accumulated amortization (466.3) (6,298.1)
------- ---------
Total goodwill and other intangibles, net $ 509.7 $ 7,045.6
======= =========
During fiscal 2002 and 2001, the Company recorded $5,603.9 million and
$50,074.8 million, respectively, of reductions of goodwill and other intangible
assets as a result of impairment analyses performed in accordance with SFAS No.
121 (see Note 8).
Other Current Liabilities:
- --------------------------
The components of other current liabilities were as follows (in millions):
June 30,
------------------
2002 2001
------ ------
Deferred revenue $ 27.4 $ 34.3
Losses on purchase commitments 24.0 52.8
Legal accrual 1.0 28.7
Other 89.5 159.4
------ ------
Total other current liabilities $141.9 $275.2
====== ======
Note 3. Investments
Available-For-Sale Investments:
- -------------------------------
The Company's investments in all debt securities and marketable equity
securities were classified as available-for-sale investments. At June 30, 2002,
the Company's available-for-sale investments were as follows (in millions):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --- ----- --------
Debt investments:
Floating rate bonds $ 22.6 $ -- $ -- $ 22.6
Municipal bonds 156.1 0.6 -- 156.7
Auction instruments 182.8 -- -- 182.8
Commercial paper 23.0 -- -- 23.0
Corporate bonds 207.2 2.5 -- 209.7
Agency bonds 400.9 1.4 -- 402.3
-------- --- ----- --------
Total debt investments 992.6 4.5 -- 997.1
Money market instruments and funds 167.5 -- -- 167.5
Marketable equity investments 39.8 1.5 (0.4) 40.9
-------- --- ----- --------
Total available-for-sale investments $1,199.9 $6.0 $(0.4) $1,205.5
======== ==== ===== ========
A-77
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Of the total estimated fair value, $167.5 million was classified as cash
equivalents and $1,038.0 million was classified as short-term investments in the
Company's Consolidated Balance Sheet.
At June 30, 2001, the Company's available-for-sale investments were as
follows (in millions):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --- --- --------
Debt investments:
Floating rate bonds $ 46.8 $ -- $-- $ 46.8
Municipal bonds 568.4 6.8 -- 575.2
Auction instruments 74.3 -- -- 74.3
Corporate bonds 65.6 0.5 -- 66.1
Agency bonds 49.9 0.1 -- 50.0
-------- --- --- --------
Total debt investments 805.0 7.4 -- 812.4
Money market instruments and funds 731.7 -- -- 731.7
Marketable equity investments 236.7 0.3 -- 237.0
-------- --- --- --------
Total available-for-sale investments $1,773.4 $7.7 $-- $1,781.1
======== ==== === ========
Of the total estimated fair value, $731.7 million was classified as cash
equivalents and $1,049.4 million was classified as short-term investments in the
Company's Consolidated Balance Sheet.
At June 30, 2002, contractual maturities of the Company's debt investments
were as follows (in millions):
Estimated
Amortized Fair
Cost Value
------ ------
Amounts maturing in less than 1 year $533.2 $533.9
Amounts maturing in 1-3 years 459.4 463.2
------ ------
Total debt investments $992.6 $997.1
====== ======
The Company's marketable equity investments consisted primarily of shares
of Nortel common stock. During fiscal 2001, the Company completed the sale of
its Zurich, Switzerland subsidiary to Nortel for 65.7 million shares of Nortel
common stock. The Company subsequently sold 41.0 million shares for total
proceeds of $659.2 million, resulting in a realized loss of $559.1 million in
fiscal 2001. The Company held 24.7 million shares as of June 30, 2002 and 2001
with fair values of $35.8 million and $223.1 million, respectively.
Long-Term Investments:
- ----------------------
The components of the Company's long-term investment were as follows (in
millions):
June 30,
------------------
2002 2001
------ ------
Non-marketable equity investments $ 79.5 $ 99.1
Equity method investments 16.1 69.9
------ ------
Total long-term investments $ 95.6 $169.0
====== ======
Reductions in Fair Value of Investments:
- ----------------------------------------
The Company regularly evaluates the carrying value of its investments. When
the carrying value of an investment exceeds the fair value and the decline in
fair value is deemed to be other-than-temporary, the Company writes down the
value of the investment to its fair value. During fiscal 2002 and 2001, the
Company recorded $225.8 million and $522.1 million, respectively, of
other-than-temporary reductions in fair value of the Company's
A-78
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
available-for-sale and non-marketable equity investments. No such charges were
recorded in fiscal 2000. Details of the other-than-temporary reductions were as
follows (in millions):
June 30,
------------------
2002 2001
------ ------
Available-for-sale investments:
Nortel common stock $187.3 $511.8
Other 9.6 10.3
Non-marketable equity investments 28.9 --
------ ------
Total reductions in fair value of investments $225.8 $522.1
====== ======
Should the fair value of the investments continue to decline in the future
periods, the Company may be required to record additional charges if the decline
is determined to be other-than-temporary.
Loss on Equity Method Investments, Net:
- ---------------------------------------
ADVA:
On June 30, 2000, the Company acquired E-TEK, which at the time of
acquisition had a 31% ownership in ADVA, a publicly traded German company that
develops and manufactures fiberoptic components and products. At June 30, 2002,
the Company had a 29% ownership in ADVA. During fiscal 2002 and 2001, the
Company recorded $0.7 million and $136.2 million, respectively, in amortization
expense related to the difference between the cost of the investment and the
underlying equity in the net assets of ADVA.
During fiscal 2002 and 2001, the Company recorded total charges of $13.9
million and $744.7 million, respectively, to write down the basis of its
investment in ADVA as the Company determined the decline in fair value was
other-than-temporary.
During fiscal 2002 and 2001, under the equity method, the Company recorded
$26.5 million and $9.5 million, respectively, as its pro rata share of ADVA's
net losses. During the second quarter of fiscal 2002, the Company reduced the
carrying amount of its investment in ADVA to $0. As the Company had no
commitment to provide additional funding to ADVA, no further pro rata share of
ADVA's net losses was recorded thereafter. Should ADVA report net income in
future periods, the Company will resume applying the equity method after its pro
rata share of ADVA's net income exceeds its pro rata share of ADVA's net losses
not recognized during the periods the equity method was suspended.
Other Equity Method Investments:
During fiscal 2002 and 2001, the Company recorded $13.5 million as its pro
rata share of net losses and $6.5 million as its pro rata share of net income,
respectively, in the Photonics Fund and other equity method investments.
Note 4. Letters and Line of Credit
As of June 30, 2002, the Company had two standby letter of credit
facilities totaling $7.3 million. In addition, the Company had an operating bank
line of credit of $4.8 million. Advances under the line of credit bear interest
at the Canadian prime rate. As of June 30, 2002, the interest rate was 4.25% and
the Company had no outstanding borrowings under the line of credit.
A-79
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5. Commitments and Contingencies
Lease Commitments
Operating Leases:
- -----------------
As of June 30, 2002, the Company had one master lease agreement with a
special purpose entity (the "Lessor"), managed and administered by a trustee,
for the development of manufacturing, research and development and
administrative facilities in Melbourne, Florida and Raleigh, North Carolina.
Under a related credit agreement, a group of financial institutions has
committed to fund the Lessor a maximum of $59.6 million to develop the projects.
As of June 30, 2002, $42.3 million has been drawn and no further withdrawal is
permitted as the development of the projects has been completed. The lease has
an initial term of five years, which began on August 4, 2000, and the Company
has an option to renew the lease for two additional terms of one year each,
subject to certain conditions. At any time prior to the expiration date of the
lease, the Company may, at its option, purchase the properties from the Lessor
for $44.6 million (the "Termination Value"), representing the principal balance
of the loan and capitalized interest. If the Company elects not to purchase the
properties, it may exercise its option to sell them to a third party at market
value within 180 days before the end of the lease term. Under the sale option,
the Company keeps any sale proceeds in excess of the Termination Value. If the
sale proceeds are below the Termination Value, the Company is obligated to make
up the shortfall up to approximately $37.5 million. Neither the real estate
assets nor the debt associated with the development of the projects was
reflected on the Company's Consolidated Balance Sheets.
As of June 30, 2002, the Company restricted $46.9 million of its short-term
investments as collateral for specified obligations of the Lessor under the
lease. These investment securities are restricted as to withdrawal and are
managed by third parties 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.
No officers or directors of the Company have any financial interest in this
operating lease arrangement, and the Company does not engage in any other
off-balance sheet arrangements with unconsolidated entities or related parties.
The Company leases other facilities under operating lease agreements that
expire at various dates through fiscal 2018. As of June 30, 2002, future annual
minimum lease payments under non-cancelable operating leases, including the
Termination Value as discussed above, were as follows (in millions):
Years Ended June 30,
- --------------------
2003 $ 37.4
2004 27.9
2005 22.5
2006 62.4
2007 12.7
Thereafter 27.1
------
Total minimum lease payments $190.0
======
Included in the future minimum lease payments table above are $80.8 million
related to lease commitments in connection with the Company's Global Realignment
Program (see Note 9).
The aggregate future minimum rentals to be received under non-cancelable
subleases totaled $6.9 million as of June 30, 2002. Rental expense was $37.5
million in fiscal 2002, $32.4 million in fiscal 2001 and $9.3 million in fiscal
2000.
Capital Leases:
- ---------------
As of June 30, 2002, the Company had one building lease in Beijing, China
and certain computer equipment leases that were classified as capital leases in
accordance with SFAS No. 13, "Accounting for Leases." As of June
A-80
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
30, 2002, the gross carrying amounts of the building and the computer equipment
were $6.8 million and $0.5 million, respectively, and total accumulated
amortization expense was $1.2 million. Amortization expense related to the
building and the computer equipment was included as part of the Company's total
depreciation expense.
The following table presents the future minimum lease payments under the
capital leases together with the present value of the minimum lease payments as
of June 30, 2002:
Years Ended June 30,
- --------------------
2003 $ 1.7
2004 0.8
2005 0.8
2006 0.8
2007 0.8
Thereafter 3.3
-----
Total minimum lease payments 8.2
Less: amount representing interest (1.4)
-----
Present value of minimum lease payments $ 6.8
=====
The building lease bears an interest rate of 4.6%, and the computer
equipment leases bear interest rates ranging from 2.4% to 8.5%.
Legal Proceedings
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
acquisition date of SDL. Under the settlement, the Company paid the claimant
$16.0 million in cash and issued 0.3 million shares of common stock valued at
approximately $2.3 million, which the Company registered for resale. The terms
of the settlement also required the Company to 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. This amount was paid in cash to the claimant in September
2002. In connection with this settlement, the Company recorded a charge of $22.8
million to selling, general and administrative expense in fiscal 2001.
Pending Litigation:
- -------------------
The Securities Class Actions:
Beginning on March 27, 2002, twenty-six securities class actions were filed
in the United States District Court for the Northern District of California
against the Company and several of its current and former officers and directors
by stockholders purporting to represent a class of purchasers of its common
stock during the period from July 27, 1999 through July 26, 2001. Some of these
lawsuits also named one of the Company's stockholders as a defendant. On April
23, 2002, a similar lawsuit was filed in the District Court for the Southern
District of New York. That lawsuit also named the Company's independent
auditors, Ernst & Young LLP, as a defendant. It was transferred to the Northern
District of California on June 25, 2002.
The lawsuits described above seek unspecified damages and allege various
violations of the federal securities laws, specifically Sections 10(b), 14(a)
and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the
Securities Act of 1933. On July 26, 2002, the Northern District of California
consolidated all the actions under the title In re JDS Uniphase Corporation
Securities Litigation, Master File No. C-02-1486 CW, and appointed the
Connecticut Retirement Plans and Trust Funds as Lead Plaintiff. A consolidated
complaint is due to be filed on October 7, 2002. No trial date has been set.
A-81
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On July 26, 2002, a securities class action captioned Zelman v. JDS
Uniphase Corp., Civil Action No. 02-CV-6002, was filed in the District Court for
the Southern District of New York. The complaint, brought by a stockholder
purporting to represent a class of purchasers of certain GOALS debt securities
issued by an investment bank during the period from March 6, 2001 through
September 26, 2001, named the Company, one of its stockholders, and several of
its current and former officers and directors as defendants and alleges
violations of the federal securities laws, specifically Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and Rule 10b-5. The parties have
stipulated to transfer the action to the District Court for the Northern
District of California. No trial date has been set.
The Derivative Actions:
Ten derivative actions purporting to be brought on the Company's behalf
have been filed in state and federal courts against several of its current and
former officers and directors. Some of these actions also named its independent
auditors, Ernst & Young LLP, as a defendant. All were based on the same factual
allegations and circumstances as the purported securities class actions and
alleged state law claims for breach of fiduciary duty, misappropriation of
confidential information, waste of corporate assets, contribution and
indemnification, insider trading, abuse of control, gross mismanagement and
unjust enrichment. These actions seek unspecified damages and no trial date has
been scheduled in any of these actions. These ten actions included: Coykendall
v. Kaplan, CV 806911, filed on April 11, 2002 in California Superior Court for
the County of Santa Clara; Plotkin v. Kaplan, CV 807496, filed on May 1, 2002 in
the same court; Wright v. Straus, CV 807799, filed on May 13, 2002 in the same
court; Schienberg v. Straus, CV810211, filed on August 9, 2002 in the same
court; Bogosian v. Straus, CIV 422822, filed on May 16, 2002 in California
Superior Court for the County of San Mateo; Abo v. Kaplan, CIV 423693, filed on
June 19, 2002 in the same court; Williams v. Ernst & Young, CIV 425385, filed on
September 3, 2002 in the same court; Cromas v. Straus, Civil Action No. 19580,
filed on April 25, 2002 in the Delaware Court of Chancery for New Castle County;
Corwin v. Kaplan, Civil Action No. C-02-2020-VRW, filed on April 24, 2002 in the
District Court for the Northern District of California; and Shalom v. Kaplan
C-02-2989 SC ARB, filed on June 21, 2002 in the same court.
On August 1, 2002, the District Court for the Northern District of
California issued an order to show cause regarding the Court's jurisdiction over
the federal court actions (Corwin and Shalom). In response, the plaintiffs in
those actions filed amended complaints that no longer named Mr. Casimir S.
Skrzypczak, a member of the Company's Board of Directors, as a defendant.
Plaintiffs have asserted that the omission of Mr. Skrzypczak permits the Court
to exercise diversity jurisdiction over the complaints, and the Court has not
yet ruled on the issue. A petition to coordinate the state court actions
(Coykendall, Wright, Plotkin, Schienberg, Bogosian, Abo and Williams) was filed
on September 5, 2002. No trial date has been set in either the state or federal
court actions.
The Company believes that the factual allegations and circumstances
underlying these securities class actions and derivative actions are without
merit. The litigation could prove to be costly and time consuming, however, and
there can be no assurance that the Company will prevail. An unfavorable outcome
of this litigation could have a material adverse effect on the Company's
financial position or results of operations.
The Company is a party to other litigation matters and claims, which are
normal in the course of its operations. While the results of such litigation
matters and claims cannot be predicted with certainty, the Company believes that
their final outcome will not have a material adverse impact on its financial
position or results of operations.
Note 6. Stockholders' Equity
Preferred Stock:
- ----------------
In connection with the acquisition of UNL in fiscal 1998, the Company
issued 0.1 million shares of non-voting, non-cumulative Series A Preferred Stock
to Koninklijke Philips Electronics N.V. ("Philips") with a par value of $0.001
per share. The shares of Series A Preferred Stock were convertible into shares
of the Company's common
A-82
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
stock using an agreed-upon formula based on the cumulative level of shipments of
certain products by UNL during the four-year earn-out period ending June 30,
2002 and the average price of the Company's common stock for the 20 trading days
prior to June 30, 2002. During the fourth quarter of fiscal 2001, UNL achieved
the cumulative unit shipments of these products that required the Company to
issue $111.7 million of the Company's common stock to Philips at the end of the
four-year earn-out period. This amount was included in "Common stock to be
issued" in the Company's Consolidated Balance Sheet as of June 30, 2002. Using
an average price of $2.85 per share, the Company issued 39.2 million shares of
its common stock to Philips in connection with the conversion of the 0.1 million
shares of Series A Preferred Stock on July 1, 2002.
In fiscal 1998, the Company adopted a Stockholder Rights Agreement, as
amended (the "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% 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 of
Directors, 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 will 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's 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's
Rights Agreement. The definitions of beneficial ownership, the calculation of
percentage ownership and the number of shares outstanding and related provisions
of the Company's 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's Rights Agreement. The Company has the right to force
conversion of the exchangeable shares in fiscal 2014.
Stock Option Plans:
- -------------------
As of June 30, 2002, the Company has reserved 67.6 million shares of common
stock for grant to employees and directors under the Amended and Restated 1993
Flexible Stock Incentive Plan, the 1996 Non-qualified Stock Option Plan and
other various plans the Company assumed as a result of acquisitions. 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.
A-83
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the Company's option activity through June
30, 2002 (in thousands, except weighted-average exercise price):
Options Outstanding
--------------------------------
Shares Available Number Weighted-Average
For Grant Of Shares Exercise Price
------------------ ----------- -----------------
Balance as of June 30, 1999 52,908 88,901 $ 5.83
Increase in authorized shares 13,789 -- --
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 as of June 30, 2000 9,037 141,429 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 as of June 30, 2001 24,147 171,559 33.02
Increase in authorized shares 50,326 -- --
Granted (46,025) 46,025 6.14
Canceled 30,551 (40,531) 35.65
Exercised -- (11,928) 3.08
Expired 8,607 (12,551) 38.17
------- -------
Balance as of June 30, 2002 67,606 152,574 26.11
======= =======
Options exercisable as of:
June 30, 2000 34,957 $ 5.83
June 30, 2001 52,864 21.66
June 30, 2002 64,412 29.34
A-84
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes information about options outstanding as of
June 30, 2002 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted-Average
Remaining
Range of Exercise Prices Number Contractual Life Weighted-Average Number Weighted-Average
(150% Increments) Outstanding (in years) Exercise Price Exercisable Exercise Price
- -------------------------- ------------- ------------------ ------------------ ------------- -----------------
$ 0.00-$ 0.01 663 7.2 $ 0.01 464 $ 0.01
0.02- 0.02 26 1.2 0.02 26 0.02
0.04- 0.04 209 8.3 0.04 187 0.04
0.10- 0.10 2 0.9 0.10 2 0.10
0.23- 0.34 141 2.1 0.31 141 0.31
0.35- 0.43 36 2.4 0.38 36 0.38
0.57- 0.82 1,646 3.2 0.72 1,530 0.72
0.86- 1.28 2,448 4.8 1.01 2,292 1.01
1.30- 1.91 2,938 4.8 1.57 2,818 1.57
1.97- 2.96 445 3.8 2.56 384 2.56
2.97- 4.36 25,492 7.2 3.85 3,330 3.78
4.47- 6.66 5,690 3.9 5.53 4,944 5.47
6.72- 10.04 26,299 6.7 8.43 5,814 7.51
10.17- 15.20 18,609 6.6 14.32 5,234 14.27
15.27- 22.90 28,706 5.0 19.75 17,887 19.80
23.20- 34.31 6,957 6.7 29.39 3,836 29.28
35.81- 53.63 4,797 6.7 47.73 2,455 47.73
53.95- 80.66 15,548 6.8 66.81 6,949 65.74
81.40- 121.88 9,399 6.2 105.02 4,623 106.15
122.88- 146.53 2,523 5.4 131.38 1,460 131.49
------ ------
152,574 64,412
======= ======
Employee Stock Purchase Plans:
- ------------------------------
In June 1998, the Company adopted the JDS Uniphase Corporation 1998
Employee Stock Purchase Plan, as amended (the "98 Purchase Plan"). The 98
Purchase Plan, effective August 1, 1998, provides eligible employees with the
opportunity to acquire an ownership interest in the Company through
participation in a program of periodic payroll deductions applied at specific
intervals to the purchase of the Company's common stock. The 98 Purchase Plan is
structured as a qualified employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986. However, the 98 Purchase Plan is not intended to
be a qualified pension, profit sharing or stock bonus plan under Section 401(a)
of the Internal Revenue Code of 1986 and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974. The 98 Purchase Plan will
terminate upon the earlier of August 1, 2008 or the date on which all shares
available for issuance have been sold. Under the 98 Purchase Plan, 2.6 million,
0.7 million and 0.6 million shares were issued during fiscal 2002, 2001 and
2000, respectively, with weighted-average prices of $6.74, $23.54 and $6.65 per
share, respectively. Of the 50.0 million shares authorized to be issued under
the 98 Purchase Plan, 45.9 million shares remained available for issuance as of
June 30, 2002.
In November 1999, the Company adopted the JDS Uniphase Corporation 1999
Canadian Employee Stock Purchase Plan, as amended (the "Canadian Plan"). The
Canadian Plan has similar provisions to the 98 Purchase Plan. Under the Canadian
Plan, 1.0 million, 0.3 million and 0.1 million shares were issued during fiscal
2002, 2001 and 2000, respectively, with weighted-average prices of $7.01, $34.09
and $23.40 per share, respectively. Of the 10.0 million shares authorized to be
issued under the Canadian Plan, 8.7 million shares remained available for
issuance as of June 30, 2002.
A-85
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As a result of the acquisitions of SDL in fiscal 2001 and OCLI and E-TEK in
fiscal 2000, the Company assumed the employee stock purchase plans of these
acquired companies. The SDL employee stock purchase plan remained effective as
of June 30, 2002 and will be terminated on October 10, 2002.
Stock-Based Compensation:
- -------------------------
In connection with certain of the Company's acquisitions, outstanding stock
options held by the employees of the 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 the employees of the companies acquired in a
purchase acquisition in accordance with FIN No. 44. The deferred compensation
expense calculation and future amortization is based on the graded vesting
schedule of the awards. Amortization of the deferred stock-based compensation
was $117.9 million and $52.6 million in fiscal 2002 and 2001, respectively.
During fiscal 2002, the Company reversed $12.0 million of the unamortized
balance of deferred stock-based compensation related to unvested options held by
certain SDL and OPA employees who left through normal attrition or were
terminated as part of the Company's Global Realignment Program.
During fiscal 2001, in connection with the severance agreement of a former
executive, the Company extended the exercise period for options to purchase 1.2
million 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 of $11.1 million associated with these stock options.
The Company applies the intrinsic value method of accounting prescribed by
APB Opinion No. 25, as interpreted by FIN No. 44, in accounting for its
employee stock options. Under APB Opinion 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 accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company is required to present pro forma information regarding its net loss
and net loss per share as if the Company had accounted for its employee stock
options (including shares issued under the employee stock purchase plans,
collectively the "options"), granted subsequent to June 30, 1995 using the fair
value method of accounting. The fair value of the options granted in fiscal
2002, 2001, and 2000 has been estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Employee Stock Option Plans Employee Stock Purchase Plans
--------------------------------- --------------------------------
FY 2002 FY 2001 FY 2000 FY 2002 FY 2001 FY 2000
--------- --------- --------- --------- --------- --------
Expected life (in years) 5.00 5.00 5.50 0.50 0.50 0.60
Volatility 0.79 0.78 0.70 0.79 0.78 0.70
Risk-free interest rate 4.30% 5.00% 6.00% 2.72% 5.70% 5.00%
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
The Black-Scholes option pricing 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 such as the Black-Scholes
option pricing model 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.
The weighted-average fair value of employee stock options granted during
fiscal 2002, 2001 and 2000 was $4.13, $26.81 and $27.92 per share, respectively.
The weighted-average exercise price of employee stock options
A-86
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
granted during fiscal 2002, 2001 and 2000 was $6.14, $34.34 and $40.94 per
share, respectively. The weighted-average fair value of shares granted under the
employee stock purchase plans during fiscal 2002, 2001 and 2000 was $2.95,
$21.92 and $7.93 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information was as follows (in millions, except per-share data):
Years Ended June 30,
----------------------------------------
2002 2001 2000
--------- ---------- ---------
Reported net loss $(8,738.3) $(56,121.9) $ (904.7)
Adjustment:
Compensation charges under SFAS No. 123, net of tax (564.0) (513.6) (246.5)
--------- ---------- ---------
Pro forma net loss $(9,302.3) $(56,635.5) $(1,151.2)
========= ========== =========
Pro forma net loss per share -- basic and diluted $ (6.92) $ (51.87) $ (1.62)
========= ========== =========
Note 7. Employee Benefit Plans
The Company sponsors the JDS Uniphase Corporation Employee 401(k)
Retirement Plan (the "401(k) Plan"), which provides retirement benefits for its
eligible employees through tax deferred salary deductions. The 401(k) Plan
allows employees to contribute up to 20% of their annual compensation, with such
contributions limited to $11,000 in calendar year 2002 as set by the Internal
Revenue Service. Prior to January 1, 2001, the Company's matching contributions
consisted of $0.25 per dollar contributed by employees with at least six months
of service. Effective January 1, 2001, the 401(k) Plan provides for a 100% match
of employees' contributions up to the first 3% of annual compensation and a 50%
match on the next 2% of compensation, subject to a maximum matching contribution
of $3,400 per employee in calendar year 2002. Employees have the option to
invest the Company's matching contributions in the Company's common stock and
are allowed to sell their shares without restrictions, subject to the Company's
insider trading policies. Employees are not allowed to invest their own
contributions in the Company's common stock. All matching contributions vest
immediately. The Company's matching contributions to the 401(k) Plan were $9.5
million in fiscal 2002, $3.2 million in fiscal 2001 and $2.5 million in fiscal
2000.
As a result of the acquisition of SDL in fiscal 2001 and OCLI and E-TEK in
fiscal 2000, the Company assumed responsibility of the 401(k) retirement plans
of these acquired companies. These retirement plans were merged into the
Company's 401(k) Plan in June 2001.
Note 8. Reduction of Goodwill and Other Long-Lived Assets
During fiscal 2002 and 2001, the Company recorded $5,979.4 million and
$50,085.0 million, respectively, of reductions of goodwill and other long-lived
assets in accordance with SFAS No. 121, excluding asset write-downs associated
with the Global Realignment Program. No such charges were recorded in fiscal
2000. The following table summarizes the components of the reductions of
goodwill and other long-lived assets in total and by operating segments (in
millions):
A-87
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Years Ended June 30,
-----------------------
2002 2001
-------- ---------
Goodwill $4,360.8 $49,699.5
Other intangible assets 1,243.1 375.3
Property, plant and equipment 375.5 10.2
-------- ---------
Total reductions of goodwill and other long-lived assets $5,979.4 $50,085.0
======== =========
By Operating Segments:
- ----------------------
Transmission and Network Components:
Goodwill $3,808.4 $48,581.4
Other intangible assets 1,031.6 298.1
Property, plant and equipment 308.3 1.6
-------- ---------
Total $5,148.3 $48,881.1
======== =========
Thin Film Products and Instrumentation:
Goodwill $ 552.4 $ 1,118.1
Other intangible assets 211.5 77.2
Property, plant and equipment 67.2 8.6
-------- ---------
Total $ 831.1 $ 1,203.9
======== =========
Fiscal 2002:
- ------------
As part of its quarterly reviews of financial results for fiscal 2002, the
Company evaluated the carrying value of its long-lived assets, including
significant amounts of goodwill and other intangible assets recorded in
connection with its various acquisitions. The assessments were performed
pursuant to SFAS No. 121 because of the prolonged economic downturn affecting
the Company's operations and expected future sales. As the Company determined
that the continued decline in market conditions within the Company's industry
was significant and other-than-temporary during the second, third and fourth
quarters of fiscal 2002, the Company recorded charges to reduce goodwill and
other long-lived assets based on the amounts by which the carrying amounts of
these assets exceeded their fair value. Fair value was determined based on
discounted future cash flows for the operating entities that had separately
identifiable cash flows. During the fourth quarter of fiscal 2002, the Company
was required to value certain of its tangible long-lived assets using specific
appraisals because the remaining goodwill associated with certain asset
groupings had been completely written off.
Second-Quarter Write-Downs:
The Company recorded total write-downs of $1,267.6 million, of which
$1,265.1 million was related to goodwill and $2.5 million was related to other
intangible assets. The goodwill and other intangible assets were primarily
associated with the acquisition of SDL and OCLI. The Company assumed a cash flow
period of 5 years, long-term annual growth rates of 5% to 60%, a discount rate
of 14%, and the terminal values were based upon estimated terminal growth rates
of 5% to 7%.
Third-Quarter Write-Downs:
The Company recorded total write-downs of $3,884.1 million, of which
$2,871.5 million was related to goodwill, $925.3 million was related to other
intangible assets and $87.3 million was related to property, plant and
equipment. The goodwill and other intangible assets were primarily associated
with the acquisition of JDS FITEL, SDL, E-TEK and OCLI. The Company assumed a
cash flow period of 5 years, long-term annual growth rates of 4% to 35%, a
discount rate of 14%, and the terminal values were based upon estimated terminal
growth rates of 5% to 7%.
A-88
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Fourth-Quarter Write-Downs:
The Company recorded total write-downs of $785.7 million, of which $193.0
million was related to goodwill, $304.5 million was related to other intangible
assets and $288.2 million was related to property, plant and equipment. The
goodwill and other intangible assets were primarily associated with the
acquisition of EPITAXX, JDS FITEL and SDL. The Company assumed a cash flow
period of 5 years, long-term annual growth rates of 10% to 50%, a discount rate
of 14%, and the terminal values were based upon an estimated terminal growth
rate of 7%.
The assumptions supporting the estimated future cash flows for all
impairment analyses, including the long-term annual growth rates, discount rates
and terminal values, reflect management's best estimates. The discount rates
were based upon the Company's weighted average cost of capital as adjusted for
the risks associated with the Company's operations.
Other Write-Downs:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002 (as discussed in further detail in Note 9), the Company restructured
certain of its businesses and realigned its operations to focus on certain
markets and core opportunities. In the process, the Company abandoned certain
redundant products and product platforms and reduced its workforce that had been
valued in previous acquisitions. In accordance with SFAS No. 121, the Company
wrote down the related intangible assets to their fair value, which was deemed
to be zero, and recorded total charges of $42.0 million, of which $31.2 million
was related to goodwill and $10.8 million was related to other intangible
assets.
Fiscal 2001:
- ------------
Beginning in the third quarter of fiscal 2001, the Company evaluated the
carrying value of its long-lived assets pursuant to SFAS No. 121 because of the
prolonged economic downturn affecting the Company's operations and expected
future sales. As the Company determined that the continued decline in market
conditions within the Company's industry was significant and
other-than-temporary during the third and fourth quarters of fiscal 2001, the
Company recorded charges to reduce goodwill and other long-lived assets based on
the amounts by which the carrying amounts of these assets exceeded their fair
value. Fair value was determined based on discounted future cash flows for the
operating entities that had separately identifiable cash flows.
Third-Quarter Write-Downs:
The Company recorded total write-downs of $39,777.1 million related to
goodwill primarily associated with the acquisition of SDL, E-TEK and OCLI. The
Company assumed a cash flow period of 5 years, long-term annual growth rates of
15% to 40%, a discount rate of 13%, and the terminal values were based upon an
estimated terminal growth rate of 7%.
Fourth-Quarter Write-Downs:
The Company recorded total write-downs of $6,934.3 million, of which
$6,846.9 million was related to goodwill, $77.2 million was related to other
intangible assets and $10.2 million was related to property, plant and
equipment. The goodwill and other intangible assets were primarily associated
with the acquisition of SDL, E-TEK and OCLI. The Company assumed a cash flow
period of 5 years, long-term annual growth rates of 15% to 60%, a discount rate
of 14.5%, and the terminal values were based upon an estimated terminal growth
rate of 7%.
The assumptions supporting the estimated future cash flows for all
impairment analyses, including the long-term annual growth rates, discount rates
and terminal values, reflect management's best estimates. The discount rates
were based upon the Company's weighted average cost of capital as adjusted for
the risks associated with the Company's operations.
A-89
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Write-Downs:
As a result of the Phase 1 restructuring activities in the fourth quarter
of fiscal 2001 (as discussed in further detail in Note 9), the Company
restructured certain of its businesses and realigned its operations to focus on
certain markets and core opportunities. In the process, the Company abandoned
certain redundant products and product platforms and reduced its workforce that
had been valued in previous acquisitions. In accordance with SFAS No. 121, the
Company wrote down the related intangible assets to their fair value, which was
deemed to be zero, and recorded total charges of $3,373.6 million, of which
$3,075.5 million was related to goodwill and $298.1 million was related to other
intangible assets.
Note 9. Global Realignment Program Charges
Overview:
- ---------
In April 2001, the Company initiated the Global Realignment Program, under
which it is restructuring its business in response to the economic downturn in
the telecommunications industry. Through the end of fiscal 2002, the Company
implemented three phases of restructuring activities and recorded restructuring
charges of $264.3 million ("Phase 1") in fiscal 2001, $243.0 million ("Phase 2")
and $42.0 million ("Phase 3") in fiscal 2002. These restructuring charges were
offset by total adjustments and cash proceeds received of $25.0 million. In
addition, the Company recorded other charges of $236.5 million in fiscal 2001
and $182.7 million in fiscal 2002 related to the Global Realignment Program.
Under the Global Realignment Program, the Company is consolidating and
reducing its manufacturing, research and development, sales and administrative
facilities in North America, Europe and Asia-Pacific. The total number of sites
closed or scheduled for closure is 25. Based on the decisions made through the
end of fiscal 2002, the Company will reduce its total workforce by approximately
16,550 employees. As of June 30, 2002, 15,450 employees have been terminated.
Phase 1 Restructuring Activities:
- ---------------------------------
The following table summarizes the Company's Phase 1 restructuring
activities from inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------- ------ -------
Total restructuring charges -- Phase 1 $ 79.1 $ 122.2 $ 63.0 $ 264.3
Cash payments (24.9) -- (0.9) (25.8)
Non-cash charges (11.1) (122.2) -- (133.3)
------ ------- ------ -------
Balance as of June 30, 2001 43.1 -- 62.1 105.2
Cash payments (31.3) -- (17.0) (48.3)
Adjustments (10.5) 5.1 0.7 (4.7)
Cash proceeds in excess of salvage value -- (2.4) -- (2.4)
Non-cash charges -- (2.7) -- (2.7)
------ ------- ------ -------
Balance as of June 30, 2002 $ 1.3 $ -- $ 45.8 $ 47.1
====== ======= ====== =======
In connection with the Phase 1 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to close 9 sites, vacate buildings at the closed sites as well as at continuing
operations, and reduce its workforce by approximately 8,800 employees. These
sites were located 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.
A-90
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Workforce Reduction:
During the fourth quarter of fiscal 2001, the Company recorded total
charges of $79.1 million primarily related to severance and fringe benefits
associated with the reduction of approximately 8,800 employees, which includes
non-cash severance charges of $11.1 million related to the modification of a
former executive's stock options. During fiscal 2002, the Company recorded a
decrease of $10.5 million to the accrual balance, as the actual amounts paid for
such charges were lower than originally estimated.
Of the 8,800 terminations for which costs have been accrued, approximately
8,100 were engaged in manufacturing, 200 in research and development, and 500 in
selling, general and administrative functions. Approximately 7,100, 900, and 800
were located in North America, Europe and Asia-Pacific, respectively. As of June
30, 2002, the Company has completed its Phase 1 workforce reduction. The
remaining accrual balance reflects ongoing severance and benefit payments to the
terminated employees.
Facilities and Equipment and Lease Commitments:
During the fourth quarter of fiscal 2001, property and equipment that were
disposed of or removed from operations resulted in a charge of $122.2 million,
of which $89.3 million was related to the Transmission and Network Components
operating segment, $29.4 million was related to the Thin Film Products and
Instrumentation operating segment and $3.5 million was related to other
operating segments. The property and equipment write-downs consisted primarily
of owned buildings, leasehold improvements, computer equipment and related
software, production and engineering equipment, and office equipment, furniture
and fixtures. During fiscal 2002, the Company recorded total adjustments of $5.1
million primarily due to additional declines in the fair market value of owned
buildings held for disposal. In addition, the Company received approximately
$2.4 million of cash proceeds in excess of the estimated salvage value of
certain restructured assets sold through auctions.
The Company has substantially completed the disposal of its restructured
assets through auctions, donations and scrapping of the assets. The remaining
assets are primarily owned buildings that could not be sold within 12 months as
was previously expected. The market conditions in the cities where these
buildings are located, Plymouth, United Kingdom and Taipei, Taiwan, have
continued to weaken during fiscal 2002. This was exacerbated with the continued
economic downturn in the telecommunications industry. The Company currently
anticipates disposing of these assets within the next 6 to 12 months.
During the fourth quarter of fiscal 2001, the Company incurred charges 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 real estate market conditions. During fiscal 2002, the
Company recorded a net increase of $0.7 million to the accrual balance. This
adjustment consisted of an increase of $8.4 million due to changes in real
estate market conditions, which resulted in changes regarding estimated vacancy
periods and sublease income, offset by a decrease of $7.7 million as a result of
negotiating subleases and termination agreements. The Company anticipates that
it will take approximately 5 to 54 months to sublease the remaining various
vacated properties. Amounts related to the lease expense, net of anticipated
sublease proceeds, will be paid over the respective lease terms through fiscal
2018.
A-91
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Phase 2 Restructuring Activities:
- ---------------------------------
The following table summarizes the Company's Phase 2 restructuring
activities from inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------- ------ -------
Total restructuring charges -- Phase 2 $ 55.8 $ 141.3 $ 45.9 $ 243.0
Cash payments (47.2) -- (13.6) (60.8)
Adjustments (5.0) (2.9) (6.8) (14.7)
Cash received in excess of salvage value -- (3.2) -- (3.2)
Non-cash charges -- (135.2) -- (135.2)
------ ------- ------ -------
Balance as of June 30, 2002 $ 3.6 $ -- $ 25.5 $ 29.1
====== ======= ====== =======
In connection with the Phase 2 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to close 8 sites, vacate buildings at the closed sites as well as at continuing
operations, and reduce its workforce by approximately 5,400 employees. These
sites were located in Arnhem, Netherlands; Gloucester, Massachusetts; Manteca,
California; Plymouth, United Kingdom; Victoria, British Columbia; Witham, United
Kingdom; and two sites in Ottawa, Ontario.
Workforce Reduction:
During the first quarter of fiscal 2002, the Company recorded total charges
of $55.8 million primarily related to severance and fringe benefits associated
with the reduction of approximately 5,400 employees. During fiscal 2002, the
Company recorded a decrease of $5.0 million to the accrual balance, as the
actual amounts paid for such charges were lower than originally estimated.
Of the 5,400 terminations for which costs have been accrued, approximately
4,500 were engaged in manufacturing, 400 in research and development, and 500 in
selling, general and administrative functions. Approximately 5,050, 300, and 50
were located in North America, Europe and Asia-Pacific, respectively. As of June
30, 2002, approximately 5,200 employees have been terminated. The Company
expects to complete its Phase 2 workforce reduction by the end of the first
quarter of fiscal 2003.
Facilities and Equipment and Lease Commitments:
During the first quarter of fiscal 2002, property and equipment that were
disposed of or removed from operations resulted in total charges of $141.3
million, of which $129.5 million was related to the Transmission and Network
Components operating segment and $11.8 million was related to the Thin Film
Products and Instrumentation operating segment. The property and equipment
write-downs consisted primarily of leasehold improvements, computer equipment
and related software, production and engineering equipment, and office
equipment, furniture and fixtures. During fiscal 2002, the Company recorded
total adjustments of $2.9 million as a result of differences between the actual
and estimated net book value of assets written down. In addition, the Company
received approximately $3.2 million of cash proceeds in excess of the estimated
salvage value of certain restructured assets sold through auctions. The Company
expects to substantially complete its disposal of the restructured assets by the
end of the first quarter of fiscal 2003.
During the first quarter of fiscal 2002, the Company accrued total charges
of $45.9 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 real estate market conditions. During fiscal 2002, the
Company recorded a net decrease of $6.8 million to the accrual balance. This
adjustment consisted of a decrease of $7.4 million due to changes in real estate
market conditions, which resulted in changes regarding estimated vacancy periods
and sublease income, offset by an increase of $0.6
A-92
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
million as a result of negotiating subleases and termination agreements. The
Company anticipates that it will take approximately 12 to 35 months to sublease
the remaining various vacated properties. Amounts related to the lease expense,
net of anticipated sublease proceeds, will be paid over the respective lease
terms through fiscal 2011.
Phase 3 Restructuring Activities:
- ---------------------------------
The following table summarizes the Company's Phase 3 restructuring
activities from inception through the end of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
------ ------ ---- ------
Total restructuring charges -- Phase 3 $ 26.7 $ 10.4 $4.9 $ 42.0
Cash payments (12.0) -- -- (12.0)
Non-cash charges -- (10.4) -- (10.4)
------ ------ ---- ------
Balance as of June 30, 2002 $ 14.7 $ -- $4.9 $ 19.6
====== ====== ==== ======
In connection with the Phase 3 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to close 7 sites, vacate buildings at the closed sites and reduce its workforce
by approximately 1,600 employees. These sites were located in Columbus, Ohio;
Eatontown, New Jersey; San Jose, California; Sydney, Australia; Toronto,
Ontario; Torquay, United Kingdom; and Waghaeusel-Kirrlach, Germany.
Implementation of plans relative to the sites located in Torquay, United Kingdom
and Waghaeusel-Kirrlach, Germany are subject to consultation with employee
representatives under applicable laws. The operations located in the San Jose,
California site are related to the Company's commercial laser unit and are
scheduled to be moved to a new location in Santa Rosa, California. Portions of
the operations at the Eatontown, New Jersey site are to be relocated.
Workforce Reduction:
During the fourth quarter of fiscal 2002, the Company recorded total
charges of $26.7 million primarily related to severance and fringe benefits
associated with the reduction of approximately 1,600 employees. Of the 1,600
terminations for which costs have been accrued, approximately 1,100 were engaged
in manufacturing, 300 in research and development, and 200 in selling, general
and administrative functions. Approximately 1,200, 200 and 200 were located in
North America, Europe and Asia-Pacific, respectively. As of June 30, 2002,
approximately 700 employees have been terminated. The Company expects to
complete its Phase 3 workforce reduction by the end of the fourth quarter of
fiscal 2003.
Facilities and Equipment and Lease Commitments:
During the fourth quarter of fiscal 2002, property and equipment that were
disposed of or removed from operations resulted in total charges of $10.4
million related to the Transmission and Network Components operating segment.
The property and equipment write-downs consisted primarily of leasehold
improvements, computer equipment and related software, production and
engineering equipment, and office equipment, furniture and fixtures. The Company
expects to complete the disposal of property and equipment by the end of the
fourth quarter of fiscal 2003.
During the fourth quarter of fiscal 2002, the Company accrued total charges
of $4.9 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 real estate market conditions. The Company anticipates that
it will take approximately 5 to 54 months to sublease the remaining various
vacated properties. Amounts related to the lease expense, net of anticipated
sublease proceeds, will be paid over the respective lease terms through fiscal
2009.
A-93
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Charges:
- --------------
In addition to the restructuring charges recorded under the Phase 1, 2 and
3 restructuring activities, the Company incurred total other charges of $419.2
million related to the Global Realignment Program. Details of the components of
the other charges were as follows (in millions):
Years Ended June 30,
------------------
2002 2001
------ ------
Additional charges resulting from a change in estimated useful life
of property and equipment $164.7 $ 6.4
Write-down of inventories -- 173.5
Purchase commitments and other obligations (7.4) 55.6
Workforce reduction 12.3 0.2
Lease commitments 6.4 --
Moving and other costs 6.7 0.8
------ ------
Total other charges $182.7 $236.5
====== ======
During fiscal 2002 and 2001, the Company recorded $164.7 million and $6.4
million, respectively, of additional charges resulting from a change in the
estimated useful life of property and equipment. Total amount recorded in fiscal
2002 was net of $3.8 million of cash proceeds in excess of the estimated salvage
value of certain assets sold through auctions. These charges include additional
depreciation from a change in the estimated useful life and the write-downs on
property and equipment that were identified for disposal but remained in use
until the date of disposal.
During fiscal 2001, the Company recorded inventory write-downs, purchase
commitments and other obligations of $229.1 million resulting from product
consolidations and discontinuations in connection with the Global Realignment
Program. During fiscal 2002, the Company recorded an adjustment of $7.4 million
to the purchase commitment accrual balance, as the actual cash payments were
lower than originally estimated.
During fiscal 2002 and 2001, the Company recorded workforce reduction
charges of approximately $12.3 million and $0.2 million, respectively, which
included payments for severance and fringe benefits that were not associated
with a formal plan of termination, retention bonuses and employee relocation
costs. The severance and fringe benefits charges were incurred as a result of
the reduction of approximately 750 employees, consisting of approximately 600 in
manufacturing, 50 in research and development, and 100 in selling, general and
administrative functions. Approximately 150, 100 and 500 were located in North
America, Europe and Asia-Pacific, respectively. As of June 30, 2002, all 750
employees have been terminated and severance and benefit payments to these
employees have been paid in full.
During fiscal 2002, the Company announced the closure of one site at
Piscataway, New Jersey. Lease commitments of $6.4 million were related primarily
to exiting and terminating building leases at this site and other continuing
operations. The Company estimated the cost of exiting and terminating the
facility leases based on the contractual terms of the agreements and the real
estate market conditions. The Company anticipates that it will take
approximately 12 to 54 months to sublease the vacated properties. Amounts
related to the lease expense, net of anticipated sublease proceeds, will be paid
over the respective lease terms through fiscal 2011.
During fiscal 2002 and 2001, the Company incurred moving and other costs of
$6.7 million and $0.8 million, respectively, related to the physical relocation
of certain facilities and equipment from buildings that the Company has disposed
or planned to dispose.
A-94
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other charges were recorded in the Company's Consolidated Statements of
Operations as follows (in millions):
Years Ended June 30,
------------------
2002 2001
------ ------
Cost of sales $124.6 $220.7
Research and development 8.2 2.9
Selling, general and administrative 49.9 12.9
------ ------
Total other charges $182.7 $236.5
====== ======
As of June 30, 2002, the accrual balance related to other charges was $25.3
million, consisting primarily of purchase and lease commitments and other
obligations. The accrual balance was included in "Other current liabilities" in
the Company's Consolidated Balance Sheet.
Recommissioning of Assets:
- --------------------------
Since the beginning of 2001, the telecommunications industry has
experienced a dramatic downturn and has remained very volatile. In April 2001,
the Company implemented its Global Realignment Program based on the best
information available at the time. Management with the appropriate level of
authority approved and committed the Company to execute the Global Realignment
Program. As the Company continued to execute its restructuring plans to realign
its operations and consolidate the facilities, the Company recommissioned
certain property and equipment that had previously been removed from operations
and fully depreciated or written down under the Global Realignment Program.
These assets are being placed back into service due to the following reasons:
(i) unanticipated changes in the industry and customer demand for certain
product lines, (ii) impact of unforeseen warranty obligations, and (iii) changes
in initial estimates. The total net book value of the recommissioned property
and equipment at the time of the write-downs was $27.7 million, of which $15.9
million was related to the Transmission and Network Components operating
segment, $10.7 million was related to the Thin Film Products and Instrumentation
operating segment and $1.1 million was related to other operating segments. The
recommissioned property and equipment were put back into use with a carrying
value of $0. Based on the dates these assets were placed back into service, the
Company would have incurred additional depreciation expense of $1.5 million in
fiscal 2002.
Note 10. Income Taxes
The Company's income tax expense (benefit) consisted of the following (in
millions):
Years Ended June 30,
--------------------------------
2002 2001 2000
------- ------- ------
Federal:
Current $ (35.8) $ (86.4) $ 34.0
Deferred 462.8 (226.6) (17.5)
------- ------- ------
427.0 (313.0) 16.5
State:
Current -- 23.0 5.0
Deferred 65.9 (32.4) (2.3)
------- ------- ------
65.9 (9.4) 2.7
Foreign:
Current (68.0) 80.9 115.9
Deferred (187.6) (130.4) (60.2)
------- ------- ------
(255.6) (49.5) 55.7
Total income tax expense (benefit) $ 237.3 $(371.9) $ 74.9
======= ======= ======
A-95
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The tax benefit associated with exercises of stock options resulted in tax
refunds of $23.0 million in fiscal 2002 and reduced income taxes payable by
$142.7 million in fiscal 2001 and $47.7 million in fiscal 2000.
The Company's loss before income taxes consisted of the following (in
millions):
Years Ended June 30,
---------------------------------------
2002 2001 2000
--------- ---------- -------
Domestic $(8,099.4) $(56,544.0) $(452.5)
Foreign (401.6) 50.2 (377.3)
--------- ---------- -------
Total loss before income taxes $(8,501.0) $(56,493.8) $(829.8)
========= ========== ========
A reconciliation of the Company's income tax benefit at the federal
statutory rate to the income tax expense (benefit) at the effective tax rate was
as follows (in millions):
Years Ended June 30,
--------------------------------------
2002 2001 2000
--------- ---------- -------
Income tax benefit computed at federal statutory rate $(2,975.3) $(19,772.9) $(290.4)
State taxes, net of federal benefit 42.8 (6.1) 1.8
Non-deductible acquired in-process research and development -- 137.6 126.2
Reductions of goodwill 1,442.9 17,515.3 --
Non-deductible amortization 428.3 1,688.7 208.4
Income tax expense (benefit) from net earnings of foreign
subsidiary considered to be permanently invested in non-U.S
operations -- 10.1 (5.5)
Valuation allowance 1,315.4 51.2 42.0
Tax exempt income (9.1) (10.6) (7.1)
Gain on sale of foreign subsidiary -- 10.9 --
Other (7.7) 3.9 (0.5)
--------- ---------- -------
Income tax expense (benefit) $ 237.3 $ (371.9) $ 74.9
========= ========== =======
The components of the Company's net deferred taxes consisted of the
following (in millions):
June 30,
-----------------------
2002 2001
--------- --------
Tax credit carryforwards $ 49.2 $ 25.1
Net operating loss carryforwards 1,240.7 851.3
Inventories 118.2 214.1
Accruals and reserves 144.5 153.5
Other 88.1 17.1
Acquisition and impairment related items 741.5 881.4
--------- --------
Gross deferred tax assets 2,382.2 2,142.5
Valuation allowance (2,270.3) (996.0)
--------- --------
Deferred tax assets 111.9 1,146.5
Acquisition-related items (41.4) (669.6)
Investment holdings (2.2) (61.7)
Other (0.3) (4.1)
--------- --------
Deferred tax liabilities (43.9) (735.4)
Total net deferred tax assets $ 68.0 $ 411.1
========= ========
The valuation allowance increased by $1,274.3 million in fiscal 2002,
$420.6 million in fiscal 2001 and $564.5 million in fiscal 2000. Increases in
the valuation allowance for domestic deferred tax assets recorded in prior
periods
A-96
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
were due to reductions in the Company's forecasts of future domestic taxable
income and the elimination of deferred tax liabilities recorded in prior
business combinations. The Company has recorded total net deferred tax assets as
of June 30, 2002 only to the extent of recoverable income taxes.
Approximately $473.0 million of the valuation allowance as of June 30, 2002
was attributable to stock option deductions, the benefit of which will be
credited to additional paid-in capital when realized. Approximately $22.3
million of the valuation allowance as of June 30, 2002 was attributable to
deferred tax assets that when realized, will first reduce unamortized goodwill,
then other non-current intangible assets of acquired subsidiaries, and then
income tax expense.
As of June 30, 2002, the Company had federal, state and foreign net
operating loss carryforwards of $3,165.2 million, $1,256.2 million and $198.9
million, respectively, and federal and state tax credit carryforwards of $37.2
million and $18.5 million, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in fiscal 2003, if not
utilized.
As of June 30, 2002, certain of the Company's domestic and foreign income
tax returns for various fiscal years were under examination by taxing
authorities. The Company believes that adequate amounts of tax have been
provided for any final assessments that may result from these examinations.
Note 11. Related Party Transactions
On October 22, 2001, the Company entered into an automation development
alliance agreement with Adept Technology ("Adept") for optical component and
module manufacturing processes. Under the agreement, Adept agrees to pay the
Company up to $5.0 million for certain research and development activities. In
connection with this alliance, the Company invested $25.0 million in Adept
convertible preferred stock and the investment is accounted for under the cost
method.
As of June 30, 2002, the Company had a $6.0 million investment, or
approximately 3% ownership, in Innovance Networks ("Innovance"), a privately
held company founded in May 2000 specializing in photonic networking solutions.
Innovance was one of the Company's significant customers in fiscal 2002.
On June 30, 1999, Furukawa Electric Co. ("Furukawa") and its subsidiaries,
in conjunction with the Company's acquisition of JDS FITEL, acquired 24% of the
Company's outstanding common stock and exchangeable shares. As of June 30, 2002,
Furukawa's ownership in the Company has decreased to approximately 8%. Furukawa
does not have control over or cannot significantly influence the management or
operating policies of the Company.
Transactions and balances with Adept, Innovance and Furukawa were as
follows (in millions):
Years Ended June 30, June 30,
---------------------------------- ----------------------
2002 2001 2000 2002 2001
---------- --------- --------- ---------- ---------
Net sales: Accounts Receivable:
Adept $ 3.0 $ -- $ - - Adept $1.0 $ --
Innovance 13.6 0.9 -- Innovance 1.7 0.6
Furukawa 0.8 3.2 0.9 Furukawa -- 1.8
During a portion of fiscal 2001, two members of the Company's Board of
Directors were officers at Cisco Systems ("Cisco"), one of the Company's
significant customers. As of June 30, 2002, no members of the Company's Board of
Directors were officers at Cisco.
Note 12. Mergers and Acquisitions
Scion:
- ------
On April 26, 2002, the Company acquired Scion, a provider of
application-specific photonic solutions based on planar lightwave circuit
manufacturing. The acquisition is expected to position the Company to deliver a
variety of present and future silica-based waveguide devices by leveraging
Scion's extensive knowledge and experience
A-97
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
in semiconductor process manufacturing. The Company was a minority shareholder
of Scion with an investment of $5.0 million, or approximately 6% ownership,
prior to the acquisition. The consideration consisted of an additional $45.4
million in cash to complete the acquisition. The Company also incurred an
estimated $0.1 million in direct transaction costs.
As part of the purchase agreement, the Company has retained $2.0 million of
the $45.4 million cash consideration for any future liabilities the Company may
incur resulting from any breach of general representations or warranties made by
Scion in the purchase agreement. The retained amount of $2.0 million was
recorded in "Other current liabilities" in the Company's Consolidated Balance
Sheet as of June 30, 2002 and will be paid to the former shareholders of Scion
on April 26, 2003 in the event no such breach of representations or warranties
exists. As of June 30, 2002, the Company was not aware of any such breach of
representations or warranties.
The total purchase price of the acquisition is summarized as follows (in
millions):
Cash consideration $50.4
Transaction costs 0.1
-----
Total purchase price $50.5
=====
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $14.6
Intangible assets acquired:
Existing technology 7.6
Core technology 3.2
In-process research and 3.2
development
Goodwill 21.9
-----
Total purchase price $50.5
=====
The weighted-average useful lives of the acquired intangible assets were as
follows:
Existing technology 3 years
Core technology 3 years
On an aggregate basis 3 years
The purchase price allocation is preliminary and is dependent on the
Company's final analysis of the acquired property and equipment, which is
expected to be completed during the first quarter of fiscal 2003. The
acquisition was accounted for as a purchase transaction under SFAS No. 141, and
accordingly, the tangible assets acquired and liabilities assumed were recorded
at their fair value at the date of the acquisition. The results of operations of
Scion have been included in the Company's financial statements subsequent to the
date of acquisition. Pro forma results of operations have not been presented
because the effect of the acquisition was not material.
A-98
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the components of the net tangible assets
acquired (in millions):
Cash $ 0.5
Inventories 2.0
Other current assets 0.9
Property and equipment 15.9
Other assets 0.3
-----
Total tangible assets acquired 19.6
Current liabilities:
Accrued site closure costs (2.7)
Other (2.3)
-----
Net tangible assets acquired $14.6
=====
The tangible assets included an adjustment of $0.2 million to write up
inventories and an adjustment of $1.9 million to write down property and
equipment to their respective fair values.
A portion of the purchase price has been allocated to existing technology,
core technology and acquired in-process research and development ("IPR&D").
These intangible assets were identified and valued through analysis of data
provided by Scion 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
the valuation.
Those developmental projects that had not reached technological feasibility
and had no future alternative uses were classified as IPR&D and expensed in the
fourth quarter of fiscal 2002. The nature of the efforts required to develop the
IPR&D into commercially viable products principally relates 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 of the acquired
entity, projected incremental cash flows from the projects when completed and
any associated risks. The sales estimates used to value the 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
Scion and its competitors.
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.
The rates utilized to discount the net cash flows to their present value
are based on Scion'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, discount rates of 25%, 31% and
40% were deemed appropriate for existing technology, core technology and IPR&D,
respectively.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes arrayed waveguide grating devices,
variable optical attenuator arrays and other advanced integrated devices.
The acquired core technology represents Scion's trade secrets and patents
developed through years of experience in design, package and manufacture of
application-specific photonic solutions based on planar lightwave circuit
manufacturing. This proprietary know-how and their extensive knowledge and
experience in semiconductor manufacturing can be leveraged by the Company to
develop new and improved products of silica-based waveguide devices.
A-99
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Goodwill, which represents the excess of the purchase price over the fair
value of net tangible and identified intangible assets acquired, is not being
amortized but will be reviewed annually for impairment, or more frequently if
impairment indicators arise, in accordance with SFAS No. 142. Goodwill has been
assigned to the Transmission and Network Components operating segment and is
expected to be deductible for tax purposes over 15 years under Internal Revenue
Code 197.
IBM's Optical Transceiver Business:
- -----------------------------------
On December 28, 2001, the Company acquired IBM's optical transceiver
business. The Company believes that the acquisition will extend its product
portfolio to provide optical solutions beyond its existing telecommunications
markets to the growing enterprise data communications markets. Under the terms
of the acquisition, the Company paid IBM $100.0 million in cash and issued 26.9
million shares of the Company's common stock valued at $232.3 million using an
average market price of $8.65 per share. The average market price was based on
the average closing price for a range of trading days around the announcement
date of the acquisition (December 19, 2001). The Company also incurred an
estimated $6.3 million in direct transaction costs. In addition, the Company may
be required to make an additional payment of up to $85.0 million in cash or the
Company's common stock in the first half of calendar year 2003 based on the
financial performance of the optical transceiver business. Any future payments
to IBM will be accounted for as part of goodwill.
The total purchase price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $232.3
Cash consideration 100.0
------
Total consideration 332.3
Transaction costs 6.3
------
Total purchase price $338.6
======
The allocation of the total purchase price was as follows (in millions):
Tangible assets acquired $ 30.7
Intangible assets acquired:
Existing technology 45.1
Core technology 15.4
Supply/contract manufacturing agreements 6.4
Non-competition agreement 1.7
Distribution agreements 1.7
Real estate license agreement 0.6
In-process research and development 22.1
Goodwill 214.9
------
Total purchase price $338.6
======
The weighted-average useful lives of the acquired intangible assets were as
follows:
Existing technology 5 years
Core technology 5 years
Supply/contract manufacturing agreements 5 years
Non-competition agreement 3 years
Distribution agreements 5 years
Real estate license agreement 1 years
On an aggregate basis 5 years
The purchase price allocation is preliminary and is dependent on the
Company's final analysis of the tangible assets, which is expected to be
completed during the first quarter of fiscal 2003. The acquisition was accounted
A-100
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
for as a purchase transaction in accordance with SFAS No. 141, and accordingly,
the tangible assets acquired were recorded at their fair value at the date of
the acquisition. No liabilities were assumed from the acquisition. The results
of operations of the optical transceiver business have been included in the
Company's financial statements subsequent to the date of acquisition. Pro forma
results of operations have not been presented because the effect of the
acquisition was not material.
The following table summarizes the components of the tangible assets
acquired (in millions):
Inventories $14.6
Property and equipment 16.1
-----
Tangible assets acquired $30.7
=====
The tangible assets included an adjustment of $2.8 million to write up
inventories and an adjustment of $13.9 million to write down property and
equipment to their respective fair values.
A portion of the purchase price has been allocated to existing technology,
core technology and acquired in-process research and development ("IPR&D"). They
were identified and valued through analysis of data provided by IBM 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
existing and core technology and IPR&D.
Those developmental projects that had not reached technological feasibility
and had no future alternative uses were classified as IPR&D and expensed in the
second quarter of fiscal 2002. The nature of the efforts required to develop the
IPR&D into commercially viable products principally relates 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 of the acquired
entity, projected incremental cash flows from the projects when completed and
any associated risks. The sales estimates used to value the 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
the optical transceiver business and its competitors.
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.
The rates utilized to discount the net cash flows to their present value
are based on the optical transceiver business' 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, discount
rates of 14%, 27% and 38% were deemed appropriate for the existing technology,
core technology and IPR&D, respectively.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes small form factor transceivers and
gigabit interface converters using optical fiber channel and gigabit Ethernet
protocols. The acquired core technology represents the optical transceiver
business' trade secrets and patents developed through years of experience in
design, package and manufacture of optical transceiver products for the storage
area networks and local area networks. The optical transceiver business'
products are designed to expand the Company's product lines beyond the existing
markets for submarine, long haul and metro applications to the enterprise data
communications markets. This proprietary know-how may be leveraged by the
Company to develop new and improved products and manufacturing processes.
A-101
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Goodwill, which represents the excess of the purchase price over the fair
value of tangible and identified intangible assets acquired, is not being
amortized but will be reviewed annually for impairment, or more frequently if
impairment indicators arise, in accordance with SFAS No. 142. Goodwill has been
assigned to the Transmission and Network Components operating segment and is
expected to be deductible for tax purposes over 15 years under Internal Revenue
Code 197.
SDL:
- ----
On February 13, 2001, the Company completed the acquisition of SDL, a
provider of products for optical communications and related markets. 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 price.
The total purchase price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $37,091.9
Assumption of stock options 4,056.4
Cash consideration 0.2
---------
Total consideration 41,148.5
Transaction costs 44.6
---------
Total purchase price $41,193.1
=========
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 617.4
Intangible assets acquired:
Existing technology 455.4
Core technology 214.2
Trademark and tradename 46.0
Assembled workforce 47.7
In-process research and development 380.7
Deferred compensation 203.7
Goodwill 39,228.0
---------
Total purchase price $41,193.1
=========
The acquisition was accounted for as a purchase transaction and
accordingly, the net tangible assets acquired were recorded at their fair value
at the date of the acquisition. Tangible assets included cash, accounts
receivable, inventories and property, plant and equipment (including an
adjustment of $22.9 million to write up inventories and an adjustment of $5.8
million to write up property, plant and equipment). Liabilities assumed
principally include accounts payable, accrued compensation and accrued expenses.
The results of operations of SDL have been included in the Company's financial
statements subsequent to the date of acquisition.
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 fiscal 2001.
A-102
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 relates 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% and 20% 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.
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 $455.4
million on a straight-line basis over an average estimated remaining useful life
of 5 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 fiberoptic telecommunication networks. SDL's
products are designed for long-haul applications, as well as emerging short-haul
applications, such as metro area networks. This proprietary know-how may be
leveraged by the Company to develop new and improved products and manufacturing
processes. The Company is amortizing the acquired core technology of $214.2
million on a straight-line basis over an average estimated remaining useful life
of 5 years.
The trademark and tradename include the SDL trademark and tradename. The
Company is amortizing the trademarks and trade names of $46.0 million on a
straight-line basis over an estimated remaining useful life of 5 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 was amortizing
the value assigned to the assembled workforce of $47.7 million on a
straight-line basis over an estimated remaining useful life of 4 years. On July
1, 2002, the carrying balance of the acquired assembled workforce of $7.3
million was reclassified to goodwill as it did not meet the contractual-legal or
the separability criteria prescribed by SFAS No. 141.
A-103
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Goodwill, which represents the excess of the purchase price over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of 5
years prior to the recording of impairment charges (see Note 8).
Optical Process Automation Corp. ("OPA"):
- -----------------------------------------
In January 2001, the Company acquired OPA of Melbourne, Florida. OPA
designs and manufactures automated and semi-automated systems for the
manufacture of fiberoptic components and modules. The acquisition was accounted
for as a purchase transaction and accordingly, the results of operations of OPA
have been included in the Company's financial statements subsequent to the date
of acquisition. 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 the Company's common stock valued at $36.5 million in exchange for OPA
options and 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 intangible assets of $15.5 million, $30.1 million related to deferred
compensation on unvested options and goodwill of $124.5 million. Subject to the
completion of certain milestones, the purchase agreement also provides for the
issuance of additional shares of the Company's common stock with the final
milestone payment scheduled to be paid on or prior to January 31, 2004.
During fiscal 2002, OPA reached several milestones and the Company removed
the milestone provisions of the remaining milestones that resulted in the
Company issuing 2.2 million shares of the Company's common stock valued at $11.9
million, of which $6.2 million was recorded as goodwill, $1.2 million was
recorded as a decrease to other current liabilities (as this amount was
previously accrued in fiscal 2001) and $4.5 million was recorded as expenses
related to the removal of the milestone provisions. During fiscal 2001, OPA
reached one milestone that resulted in the Company issuing 0.1 million shares of
the Company's common stock valued at $2.9 million.
The Company is amortizing the purchased intangible assets and goodwill over
a period of 2 to 7 years. On July 1, 2002, the carrying balance of the acquired
assembled workforce of $0.9 million was reclassified to goodwill as it did not
meet the contractual-legal or the separability criteria prescribed by SFAS No.
141. In addition, beginning July 1, 2002, goodwill is no longer being amortized
but will be reviewed annually for impairment, or more frequently if impairment
indicators arise, in accordance with SFAS No. 142.
Iridian Spectral Technologies Limited ("Iridian"):
- --------------------------------------------------
In October 2000, the Company acquired the remaining 80.1% interest in
Iridian of Ottawa, Canada. Iridian is a supplier of custom designed thin film
filters. The acquisition was accounted for as a purchase transaction, and
accordingly, the results of operations of Iridian have been included in the
Company's financial statements 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 transaction costs of $0.1
million. The purchase price allocation included net tangible assets of $2.3
million, acquired IPR&D of $0.6 million, purchased intangible assets of $1.3
million and goodwill of $35.2 million. The Company was amortizing the purchased
intangible assets and goodwill over a period of 5 years prior to the recording
of impairment charges (see Note 8).
Sale of Iridian:
In fiscal 2002, the Company sold 80.1% of its ownership in Iridian to IST
Holdings for $1.1 million in cash, and retained the remaining 19.9%. After
adjusting for the net costs of the assets sold and the expenses associated with
the divestiture, the Company realized a gain of $0.1 million from the
transaction.
Epion Corporation ("Epion"):
- ----------------------------
In September 2000, the Company acquired 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
A-104
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
acquisition was accounted for as a purchase transaction and accordingly, the
results of operations of Epion have been included in the Company's financial
statements subsequent to the acquisition date. The initial purchase price of
$95.3 million included consideration of 0.8 million shares of the Company's
common stock valued at $86.8 million, the issuance of options to purchase an
additional 91,862 shares of the Company's common stock valued at $8.2 million in
exchange for Epion options and 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 intangible assets of $10.9 million, $3.7 million
related to deferred compensation on unvested options and goodwill of $60.8
million. Subject to the completion of certain milestones, the merger agreement
also provides for the issuance of additional shares of common stock with the
final milestone payment scheduled to be paid on or prior to January 31, 2003.
During fiscal 2002, Epion reached a milestone that resulted in the Company
issuing 6.6 million shares of the Company's common stock valued at $30.0
million, of which $27.0 million was recorded as goodwill, $2.5 million was
recorded as expenses as a portion of the milestone required continued service to
the Company in order to be earned and $0.5 million was recorded as deferred
compensation related to unvested options. During fiscal 2001, Epion reached
several milestones that resulted in the Company issuing 1.4 million shares of
the Company's common stock valued at $98.7 million (including $9.5 million
related to deferred compensation on unvested options).
The Company is amortizing the purchased intangible assets and goodwill over
a period of 3 to 5 years. On July 1, 2002, the carrying balance of the acquired
assembled workforce of $1.3 million was reclassified to goodwill as it did not
meet the contractual-legal or the separability criteria prescribed by SFAS No.
141. In addition, beginning July 1, 2002, goodwill is no longer being amortized
but will be reviewed annually for impairment, or more frequently if impairment
indicators arise, in accordance with SFAS No. 142.
E-TEK:
- ------
On June 30, 2000, the Company completed the acquisition of E-TEK, a
designer and manufacturer of components and modules for fiberoptic systems. 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 included 0.8 million exchangeable shares of its
subsidiary, JDS Uniphase Canada, Ltd., each of which is exchangeable for one
share of the Company's 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 transaction costs of $32.3 million.
The total purchase price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $15,369.3
Assumption of stock options 2,005.4
Cash consideration 53.9
Assumption of employee stock purchase plan 45.5
---------
Total consideration 17,474.1
Transaction costs 32.3
---------
Total purchase price $17,506.4
=========
A-105
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 395.0
Marketable equity investments 950.0
Intangible assets acquired:
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 $17,506.4
=========
The acquisition was accounted for as a purchase transaction and
accordingly, the net tangible assets acquired were recorded at their fair value
at the date of the acquisition. Tangible assets included cash, accounts
receivable, inventories and property, plant and equipment (including an
adjustment of $48.6 million to write up inventories). Liabilities assumed
principally included accounts payable, accrued compensation and accrued
expenses. The results of operations of E-TEK have been included in the Company's
financial statements subsequent to the date of acquisition.
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 included
a $932.0 million increase to E-TEK's investment of ADVA, which is accounted for
under the equity method of accounting. The increase represented the fair value
of the Company's investment over the net assets of ADVA.
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 relates 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 of the acquired
entity, 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% to 20%. 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.
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 components and modules,
isolators, couplers, and micro-optic integrated components. Prior to the
recording of impairment charges (see Note 8), the Company was amortizing the
acquired existing technology of $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 fiberoptic telecommunication networks.
A-106
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
E-TEK's products are designed for established terrestrial and submarine
long-haul applications, as well as emerging short-haul applications, such as
metro area networks. This proprietary know-how may be leveraged by E-TEK to
develop new and improved products and manufacturing processes. Prior to the
recording of impairment charges (see Note 8), the Company was amortizing the
acquired core technology of $168.5 million on a straight-line basis over an
average estimated remaining useful life of 5 years.
The trademark and tradename included the E-TEK trademark and tradename as
well as all branded E-TEK products, such as E-TEK(TM), Unifuse(TM), Kaifa(TM)
and TIGRATM. Prior to the recording of impairment charges (see Note 8), the
Company was amortizing the trademark and tradename of $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 functions. Prior to the recording of
impairment charges (see Note 8), the Company was amortizing the value assigned
to the assembled workforce of $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 over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of 5
years prior to the recording of impairment charges (see Note 8).
Fujian Casix Laser, Inc. ("Casix"):
- -----------------------------------
On April 29, 2000, the Company acquired Casix of Fuzhou, China, for $60.0
million in cash. Casix is a supplier of crystals, fiberoptic components and
optics for telecommunications networks. 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
acquisition was accounted for as a purchase transaction and accordingly, the
results of operations of Casix have been included in the Company's financial
statements subsequent to the acquisition date. The purchase price allocation
included net tangible assets of $11.4 million and purchased intangible assets
(primarily goodwill) of $48.6 million. The purchased intangible assets were
being amortized over 5 years prior to the recording of impairment charges (see
Note 8).
Cronos Integrated Microsystems, Inc. ("Cronos"):
- ------------------------------------------------
On April 19, 2000, the Company acquired Cronos, a provider of optical
micro-electro-mechanical systems components and component technology to the
fiberoptic communications market. The acquisition was accounted for as a
purchase transaction and accordingly, the results of operations of Cronos have
been included in the Company's financial statements subsequent to the
acquisition date. The total purchase price of $565.3 million included
consideration of 6.3 million shares of the Company's common stock, the issuance
of options to purchase 0.2 million shares valued at $15.7 million in exchange
for Cronos options and direct transaction costs of $1.1 million.
The total purchase price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $548.5
Assumption of stock options 15.7
------
Total consideration 564.2
Transaction costs 1.1
------
Total purchase price $565.3
======
A-107
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 1.0
Intangible assets acquired:
Developed technology 8.0
Core technology 4.1
Assembled workforce 1.8
In-process research and development 6.3
Goodwill 544.1
------
Total purchase price $565.3
======
Net tangible assets acquired included cash, accounts receivable,
inventories and property and equipment, offset by liabilities assumed including
principally accounts payable, accrued compensation and accrued expenses.
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 relates 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 of the acquired
entity, 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% to 20%. 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.
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. Prior to the recording of
impairment charges (see Note 8), the Company was amortizing the acquired
existing technology of $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 fiberoptic and RF
telecommunication networks. Prior to the recording of impairment charges (see
Note 8), the Company was amortizing the acquired core technology of $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
and training, general and administrative, and engineering functions. Prior to
the recording of impairment charges (see Note 8), the Company was amortizing the
value assigned to the assembled workforce of $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 over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of 5
years prior to the recording of impairment charges (see Note 8).
A-108
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During the first quarter of fiscal 2003, the Company announced an agreement
to sell most of the assets of Cronos (see Note 15).
OCLI:
- -----
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 acquisition was accounted for as a purchase
transaction and accordingly, the results of operations of OCLI have been
included in the Company's financial statements subsequent to the acquisition
date. The total purchase price of $2,707.5 million included consideration of
54.0 million shares of the Company's 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 price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $2,432.1
Assumption of stock options 267.2
--------
Total consideration 2,699.3
Transaction costs 8.2
--------
Total purchase price $2,707.5
========
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 253.2
Intangible assets acquired:
Developed technology 232.2
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 $2,707.5
========
Tangible assets acquired included cash, accounts receivable, inventories
and property, plant and equipment (including an adjustment to write up property,
plant and equipment to fair value by $28.0 million). Liabilities assumed
principally included accounts payable, accrued compensation and accrued
expenses.
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 relates 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 of the acquired
entity, projected incremental cash flows from the projects when completed and
any
A-109
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
associated risks. The projected incremental cash flows were discounted back to
their present value using discount rates ranging from 18% to 25%. 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 Products, Applied Photonics, and
Information Industries groups. The Company is amortizing the acquired existing
technology of $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 improved thin film
products, processes and manufacturing equipment. The Company is amortizing the
proprietary know-how of $161.9 million on a straight-line basis over an average
estimated remaining useful life of 10.4 years.
The trademark and tradename included the OCLI trademark and tradename as
well as all branded OCLI products such as GlareGuard[RegTM] and processes such
as MetaMode[RegTM]. The Company is amortizing the trademark and tradename of
$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 functions. The Company was amortizing the
value assigned to the assembled workforce of $14.3 million on a straight-line
basis over an estimated remaining useful life of 6 years. On July 1, 2002, the
carrying value of the acquired assembled workforce of $0.9 million was
reclassified to goodwill as it did not meet the contractual-legal or the
separability criteria prescribed by SFAS No. 141.
Goodwill, which represents the excess of the purchase price over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of
7.2 years prior to the recording of impairment charges (see Note 8).
Integrierte Optik GmbH & Co. KG ("IOT"):
- ----------------------------------------
In January 2000, the Company acquired the remaining 49% minority interest
in IOT, a joint venture of the Company 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%. As a
result of the transaction, the Company's ownership interest increased to 100%
and the minority interest adjustments have been discontinued. IOT manufactures
passive optical splitters for fiberoptic network applications in cable plants
and transmission networks. The purchase price allocation included net tangible
assets of $2.9 million and purchased intangible assets (including goodwill) of
$9.7 million. The purchased intangible assets were being amortized over 5 years
prior to the recording of impairment charges (see Note 8).
Oprel Technologies, Inc. ("OPREL"):
- -----------------------------------
In December 1999, the Company acquired OPREL, a developer of optical
amplifiers, test equipment and optoelectronic packaging, located in Nepean,
Ontario. The acquisition was accounted for as a purchase transaction and
accordingly, the results of operations of OPREL have been included in the
Company's financial statements 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 the Company's common stock. The total purchase price was $27.7
million. The purchase price allocation included net tangible assets of $1.4
million and purchased intangible assets (including goodwill) of $26.3 million.
The purchased intangible assets were being amortized over 5 years prior to the
recording of impairment charges (see Note 8).
A-110
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SIFAM Limited ("SIFAM"):
- ------------------------
In December 1999, the Company acquired SIFAM, a supplier of fused
components for fiberoptic 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
acquisition was accounted for as a purchase transaction and accordingly, the
results of operations of SIFAM have been included in the Company's financial
statements subsequent to the acquisition date.
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 4.3
Intangible assets acquired:
Developed technology 27.0
Trade secrets and patents 6.1
Assembled workforce 0.6
In-process research and development 3.0
Goodwill 70.1
Deferred tax liabilities (13.5)
------
Total purchase price $ 97.6
======
Net tangible assets acquired included cash, accounts receivable,
inventories and property and equipment, offset by liabilities assumed including
principally accounts payable, accrued compensation and accrued expenses.
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 relates 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 of the acquired
entity, 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% to 18%. 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. Prior to the recording of impairment charges (see Note 8), the Company
was amortizing the acquired existing technology of $27.0 million on a
straight-line basis over an average estimated remaining useful life of 5 years.
The acquired core technology represents SIFAM trade secrets and patents
developed through years of experience designing and manufacturing fused
components for fiberoptic telecommunication networks. Prior to the
A-111
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
recording of impairment charges (see Note 8), the Company was amortizing the
acquired core technology of $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
and training, general and administrative, and engineering functions. Prior to
the recording of impairment charges (see Note 8), the Company was amortizing the
value assigned to the assembled workforce of $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 over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of 5
years prior to the recording of impairment charges (see Note 8).
EPITAXX, Inc.:
- --------------
In November 1999, the Company acquired EPITAXX, a supplier of optical
detectors and receivers for fiberoptic telecommunications and cable televisions
networks. The acquisition was accounted for as a purchase transaction and
accordingly, the results of operations of EPITAXX have been included in the
Company's financial statements subsequent to the acquisition date. The Company
paid cash in the amount of $9.3 million and issued 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 price of the acquisition is summarized as follows (in
millions):
Value of common stock issued $429.5
Assumption of stock options 61.9
------
Total consideration 491.4
Cash paid to seller 9.3
Transaction costs 1.0
------
Total purchase price $501.7
======
The allocation of the total purchase price was as follows (in millions):
Net tangible assets acquired $ 14.2
Intangible assets acquired:
Developed technology 63.4
Trademark and tradename 5.4
Assembled workforce 2.9
In-process research and development 16.7
Goodwill 397.9
Deferred tax assets 1.2
------
Total purchase price $501.7
======
Net tangible assets acquired included cash, accounts receivable,
inventories and property and equipment, offset by liabilities assumed including
principally accounts payable, accrued compensation and accrued expenses.
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
A-112
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 relates 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 of the acquired
entity, 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% to 18%. 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 $63.4 million on a straight-line basis over an average estimated
remaining useful life of 7 years.
The trademark and tradename included the EPITAXX trademark and tradename.
The Company is amortizing the trademark and tradename 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
functions. The Company was amortizing the value assigned to the assembled
workforce of $2.9 million on a straight-line basis over an estimated remaining
useful life of 4 years. On July 1, 2002, the carrying balance of the acquired
assembled workforce of $0.4 million was reclassified to goodwill as it did not
meet the contractual-legal or the separability criteria prescribed by SFAS No.
141.
Goodwill, which represents the excess of the purchase price over the fair
value of net tangible and identified intangible assets acquired, was being
amortized on a straight-line basis over its estimated remaining useful life of 7
years. Beginning July 1, 2002, goodwill is no longer being amortized but will be
reviewed annually for impairment, or more frequently if impairment indicators
arise, in accordance with SFAS No. 142.
Ramar Corporation ("Ramar"):
- ----------------------------
In October 1999, the Company acquired Ramar of Northborough, Massachusetts
for $1.0 million in cash and convertible debt as described below. Ramar
designed, developed and manufactured lithium-niobate products for
telecommunications applications. The acquisition was accounted for as a purchase
transaction and accordingly, the results of operations of Ramar have been
included in the Company's financial statements subsequent to the acquisition
date. The convertible debt was composed of $3.5 million in demand obligations
and two performance-based instruments totaling $1.0 million that became due upon
achieving certain milestones through October 2001. The convertible debt bears
interest at 5.54% per annum and the principal could be exchanged for newly
issued shares of common stock at a price of $27.961 per share. The total
purchase price was $4.5 million. The purchase price allocation included net
tangible assets of $0.2 million and purchased intangible assets (including
goodwill) of $4.3 million (net of deferred tax). The purchased intangible assets
were being amortized over 5 years prior to the recording of impairment charges
(see Note 8). During fiscal 2001, $1.4 million of debt was converted into 0.1
million shares of the Company's common stock. As of June 30, 2002, convertible
debt of $2.1 million was included in "Other current liabilities" in the
Company's Consolidated Balance Sheet.
A-113
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
AFC Technologies, Inc. ("AFC"):
- -------------------------------
In August 1999, the Company acquired AFC of Ottawa, Canada, for $22.0
million in cash and common stock valued at $17.5 million. AFC designed,
developed and manufactured fiber amplifiers for telecommunications applications.
The acquisition was accounted for as a purchase transaction and accordingly, the
results of operations of AFC have been included in the Company's financial
statements subsequent to the acquisition date. The purchase price allocation
included net tangible assets of $1.3 million and purchased intangible assets
(including goodwill) of $38.2 million. The purchased intangible assets were
being amortized over 5 years prior to the recording of impairment charges (see
Note 8).
Note 13. Operating Segments and Geographic Information
The Company evaluates its reporting segments in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS No. 131. The Chief Executive Officer allocates
resources to each segment based on their business prospects, competitive
factors, net sales and operating results.
The Company designs and manufactures products for fiberoptic
communications, as well as for markets where its core optics technologies
provide solutions for industrial, commercial and consumer applications. During
fiscal 2002, the Company changed the structure of its internal organization and
concluded that it has two principal operating segments: (i) Transmission and
Network Components and (ii) Thin Film Products and Instrumentation. Transmission
and Network Components provides fiberoptic components and modules for system
manufacturers in the telecommunications, data communications and cable
television industries. Thin Film Products and Instrumentation consists primarily
of the Company's non-telecommunications businesses for display, security,
medical/environmental instrumentation, decorative, aerospace and defense
applications. The amounts shown as "All other" consist of certain unallocated
corporate-level operating expenses, as well as the Company's division which
designs and manufactures automated and semi-automated systems for the
manufacture of fiberoptic components and modules. In addition, the Company does
not allocate income taxes or specifically identifiable assets to its operating
segments. Where practicable, the Company allocates corporate sales, marketing,
finance and administration expenses to the operating segments, primarily as a
percentage of net sales.
Information regarding reportable segments was as follows (in millions):
Years Ended June 30,
-----------------------------------
2002 2001 2000
-------- -------- --------
Transmission and Network Components:
Net sales $ 767.5 $2,670.3 $1,169.3
Intersegment sales -- -- --
-------- -------- --------
Net sales to external customers 767.5 2,670.3 1,169.3
Operating income (loss) (872.8) 248.7 443.0
Thin Film Products and Instrumentation:
Net sales 336.6 693.1 331.3
Intersegment sales (12.7) (132.4) (70.2)
-------- -------- --------
Net sales to external customers 323.9 560.7 261.1
Operating income (loss) (4.6) 182.9 67.0
Net sales by reportable segments 1,091.4 3,231.0 1,430.4
All other net sales 6.8 1.8 --
-------- -------- --------
Total net sales $1,098.2 $3,232.8 $1,430.4
======== ======== ========
A-114
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Years Ended June 30,
-----------------------------------------
2002 2001 2000
--------- ---------- ---------
Operating income (loss) by reportable segments $ (877.4) $ 431.6 $ 510.0
All other operating income (loss) 36.4 (454.4) (50.3)
Unallocated amounts:
Acquisition-related charges and payroll taxes on stock option
exercises (1,463.6) (6,239.6) (1,324.8)
Reduction of goodwill and other long-lived assets (5,979.4) (50,085.0) --
Interest and other income, net 48.3 48.5 35.3
Gain on sale of subsidiaries 0.1 1,770.2 --
Gain (loss) on sale of investments 15.0 (559.1) --
Reduction in fair value of investments (225.8) (522.1) --
Loss on equity method investments, net (54.6) (883.9) --
--------- ---------- ---------
Loss before income taxes $(8,501.0) $(56,493.8) $ (829.8)
========= ========== =========
Intersegment sales were recorded at fair market value less an agreed-upon
discount.
The Company operates primarily in two geographic regions: North America
and Europe. The following table presents net sales and identifiable assets by
geographic regions (in millions):
Years Ended June 30,
------------------------------------
2002 2001 2000
-------- -------- --------
Net sales:
North America $ 807.3 $2,189.4 $1,103.7
Europe 196.6 840.6 256.8
Rest of world 94.3 202.8 69.9
-------- -------- --------
Total net sales $1,098.2 $3,232.8 $1,430.4
======== ======== ========
June 30,
-----------------------
2002 2001
-------- ---------
Identifiable assets:
North America $2,688.6 $11,961.0
Europe 157.7 169.3
Rest of world 158.2 115.1
-------- ---------
Total identifiable assets $3,004.5 $12,245.4
======== =========
Net sales were assigned to geographic regions based on the customers'
shipment locations. Identifiable assets were identified based on the operations
in the corresponding geographic areas.
During fiscal 2002, no customer accounted for more than 10% of net sales.
During fiscal 2001, three customers, Nortel, Alcatel and Lucent, accounted for
14%, 12% and 10% of net sales, respectively. During fiscal 2000, Lucent and
Nortel accounted for 21% and 15% of net sales, respectively.
Note 14. Sale of Subsidiaries
In fiscal 2002, the Company sold 80.1% of its ownership in Iridian to IST
Holdings for $1.1 million in cash, and retained the remaining 19.9%. After
adjusting for the net costs of the assets sold and the expenses associated with
the divestiture, the Company realized a gain of $0.1 million from the
transaction.
In fiscal 2001, the Company completed the sale of its Zurich, Switzerland
subsidiary to Nortel, one of the Company's significant customers, for 65.7
million shares of Nortel common stock valued at $1,953.3 million. In
A-115
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
addition, the Company may receive up to an additional $500.0 million in Nortel
common stock 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 the expenses associated with the divestiture, the
Company realized a gain of $1,770.2 million from the transaction. The shares of
Nortel common stock are accounted for as available-for-sale securities (see Note
3). During fiscal 2001, the Company sold 41.0 million shares for total proceeds
of $659.2 million, resulting in a realized loss of $559.1 million. As of June
30, 2002, the Company held 24.7 million shares with a fair value of $35.8
million.
Note 15. Subsequent Events (Unaudited)
ERP Software Upgrade:
- ---------------------
In July 2002, the Company signed an agreement to upgrade its current ERP
software and to outsource the operations and maintenance of the upgraded
application. This decision is expected to result in increased depreciation
during fiscal 2003 as a result of a change in the estimated useful life of the
related software and license fees and computing hardware.
Sale of Cronos:
- ---------------
In August 2002, the Company announced an agreement to sell most of the
assets of Cronos to MEMSCAP, a supplier of optical micro-electro-mechanical
system solutions located in France. As part of the transaction, the Company is
to receive approximately 10.5 million shares of MEMSCAP. In addition, the
Company is to receive warrants to purchase up to 6.5 million additional shares
of MEMSCAP based on the future performance of Cronos over a 30-month period
following the completion of the sale. The Company expects to complete the sale
by the end of the first quarter of fiscal 2003.
A-116
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 16. Quarterly Financial Information (Unaudited)
The following table presents the Company's quarterly financial information
for fiscal 2002 and 2001 (in millions, except per-share data):
June 30, March 31, December 31, September 30,
2002 2002 2001 2001
--------- --------- -------- ---------
Net sales $ 221.7 $ 261.8 $ 286.1 $ 328.6
Cost of sales 252.1 240.1 335.6 343.3
--------- --------- -------- ---------
Gross profit (loss) (30.4) 21.7 (49.5) (14.7)
Operating expenses:
Research and
development 63.7 57.8 64.1 69.2
Selling, general and
administrative 94.2 84.0 98.4 106.3
Amortization of
purchased
intangibles 50.4 373.7 441.3 443.3
Acquired in-process
research and
development 3.2 -- 22.1 --
Reduction of
goodwill and
other long-lived
assets 785.7 3,884.1 1,267.6 42.0
Restructuring
charges 27.8 (10.8) -- 243.0
--------- -------- --------- ---------
Total operating
expenses 1,025.0 4,388.8 1,893.5 903.8
Loss from operations (1,055.4) (4,367.1) (1,943.0) (918.5)
Interest and other
income, net 12.3 11.2 9.7 15.1
Gain on sale of
subsidiaries 0.1 -- -- --
Gain (loss) on sale of
investments 4.1 4.5 6.4 --
Reduction in fair
value of
investments (111.4) (7.9) -- (106.5)
Loss on equity
method investments,
net (1.0) (8.5) (25.8) (19.3)
--------- --------- --------- ---------
Loss before income
taxes (1,151.3) (4,367.8) (1,952.7) (1,029.2)
Income tax expense
(benefit) (108.8) (26.9) 177.8 195.2
--------- --------- --------- ---------
Net loss $(1,042.5) $(4,340.9) $(2,130.5) $(1,224.4)
========= ========= ========= =========
Net loss per share --
basic and diluted(1) $ (0.76) $ (3.19) $ (1.60) $ (0.93)
========= ========= ========= =========
June 30, March 31, December 31, September 30,
2001 2001 2000 2000
---------- ---------- -------- ---------
Net sales $ 601.1 $ 920.1 $ 925.1 $ 786.5
Cost of sales 926.0 494.2 449.8 436.7
---------- ---------- -------- ---------
Gross profit (loss) (324.9) 425.9 475.3 349.8
Operating expenses:
Research and
development 94.3 98.0 71.2 62.4
Selling, general and
administrative 155.4 440.8 105.7 116.2
Amortization of
purchased
intangibles 1,055.3 2,120.2 1,104.1 1,107.4
Acquired in-process
research and
development 0.6 383.7 -- 8.9
Reduction of
goodwill and
other long-lived
assets 10,307.8 39,777.2 -- --
Restructuring
charges 264.3 -- -- --
---------- ---------- -------- ---------
Total operating
expenses 11,877.7 42,819.9 1,281.0 1,294.9
Loss from operations (12,202.6) (42,394.0) (805.7) (945.1)
Interest and other
income, net 10.6 12.1 12.2 13.6
Gain on sale of
subsidiaries -- 1,770.2 -- --
Gain (loss) on sale of
investments (559.1) -- -- --
Reduction in fair
value of
investments (514.6) (7.5) -- --
Loss on equity
method investments,
net (30.5) (759.9) (52.3) (41.2)
---------- ---------- -------- ---------
Loss before income
taxes (13,296.2) (41,379.1) (845.8) (972.7)
Income tax expense
(benefit) (934.2) 468.8 49.6 43.9
---------- ---------- -------- ---------
Net loss $(12,362.0) $(41,847.9) $ (895.4) $(1,016.6)
========== ========== ======== =========
Net loss per share --
basic and diluted(1) $ (9.39) $ (36.63) $ (0.93) $ (1.07)
========== ========== ======== =========
- ------------
(1) Net loss per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net loss per share does not
equal the annual net loss per share.
A-117
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers required by this
Item is incorporated by reference to the section entitled "Executive Officers"
under Item 1 of this Annual Report. Information regarding the Company's
directors required by this Item is incorporated by reference to the section
entitled "Proposal One -- Elections of Directors" in the Company's definitive
Proxy Statement in connection with the 2002 Annual Meeting of Stockholders (the
"Proxy Statement"). Information required by Item 405 of Regulation S-K is
incorporated by reference to the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Information regarding the Company's stockholder approved and non-approved
equity compensation plans is incorporated by reference to the section entitled
"Equity Compensation Plans" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference to the
sections entitled "Certain Relationships and Related Transactions" and
"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement.
A-118
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following items are filed as part of this Annual Report:
1. Financial Statements:
Page
----
Report of Independent Auditors ....................................................... A-64
Consolidated Statements of Operations -- Years Ended June 30, 2002, 2001 and 2000 .... A-65
Consolidated Balance Sheets -- June 30, 2002 and 2001 ................................ A-66
Consolidated Statements of Cash Flows -- Years Ended June 30, 2002, 2001 and 2000 .... A-67
Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 2002, 2001 and
2000 ............................................................................... A-68
Notes to Consolidated Financial Statements ........................................... A-69
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 the information required is presented in the Company's
consolidated financial statements and notes thereto under Item 8 of this Annual
Report.
JDS UNIPHASE CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts (1) Deduction (2) Period
-------------- ------------ -------------- --------------- -----------
Allowance for doubtful accounts:
Year ended June 30, 2002 $40.3 $13.1 $0.2 $(10.7) $42.9
Year ended June 30, 2001 8.2 26.4 6.0 (0.3) 40.3
Year ended June 30, 2000 1.1 0.8 6.3 -- 8.2
- ------------
(1) Allowance assumed through the acquisitions of Scion in fiscal 2002, SDL in
fiscal 2001, and OCLI, E-TEK and EPITAXX in fiscal 2000.
(2) Charges for uncollectible accounts, net of recoveries.
A-119
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
JDS UNIPHASE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
October 31, 2002
The undersigned hereby appoints JOZEF STRAUS, Ph.D. and ANTHONY R.
MULLER, or either of them, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
side, all of the shares of Common Stock of JDS Uniphase Corporation that the
undersigned is entitled to vote at the Annual Meeting of Stockholders to be held
at 8:30 a.m., Pacific Standard Time, on October 31, 2002 at the Company's
offices located at 1768 Automation Parkway, San Jose, California 95131, or any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO SUCH DIRECTIONS ARE MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD
OF DIRECTORS AND FOR PROPOSAL 2.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
JDS UNIPHASE CORPORATION
C/O PROXY SERVICES
P.O. BOX 9142
FARMINGDALE, NY 11735
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time the day before the
cut-off date or meeting date. Have your proxy card in hand when you access the
web site. You will be prompted to enter your 12-digit Control Number which is
located below to obtain your records and to create an electronic voting
instruction form.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59
P.M. Eastern Time the day before the cut-off date or meeting date. Have your
proxy card in hand when you call. You will be prompted to enter your 12-digit
Control Number which is located below and then follow the simple instructions
the Vote Voice provides you.
VOTE BY MAIL
Mark, sign, and date your proxy card and return it in the postage-paid envelope
we have provided or return it to JDS Uniphase Corporation, c/o ADP, 51 Mercedes
Way, Edgewood, NY 11717.
TO VOTE, MARK BLOCKS BELOW IN
BLUE OR BLACK INK AS FOLLOWS: JDSUNI KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
JDS UNIPHASE CORPORATION
1. Election of three Class III Directors For Withhold For All
All All Except
Nominees: 01) Richard T. Liebhaber
02) Casimir S. Skrzypczak 0 0 0
03) Jozef Straus, Ph.D.
To withhold authority to vote, mark
"For All Except" and write the
nominee's number on the line below.
- -----------------------------------
Vote On Proposal For Against Abstain
2. Proposal to ratify the appointment of Ernst & 0 0 0
Young LLP as the independent auditors for JDS
Uniphase Corporation for the fiscal year
ending June 30, 2003.
Authority is hereby given to the proxies identified on the front of this card to
vote, in their discretion, upon such other business as may properly come before
the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
REPLY ENVELOPE.
Please sign exactly as your name appears on this proxy card. If shares are held
jointly, each person should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
- --------------------------- ------- --------------------------- -------
Signature Date Signature (Joint Owners) Date
[PLEASE SIGN WITHIN BOX]