SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
----------
JDS UNIPHASE CORPORATION
(Name of Registrant as Specified in its Charter)
----------
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:
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pursuant to Exchange Act Rule 0-11:
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(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.:
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(4) Date Filed:
[jds logo]
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
Notice of Annual Meeting of Stockholders
and Proxy Statement
Letter to Stockholders
2003 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 logo]
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
October 2, 2003
Dear Stockholder:
I am pleased to invite you to attend JDS Uniphase Corporation's 2003
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 November 6, 2003 at 10:00 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 2003 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 three
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/ Kevin J. Kennedy
Kevin J. Kennedy, Ph.D.
Chief Executive Officer
[jds logo]
JDS UNIPHASE CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 6, 2003
- --------------------------------------------------------------------------------
TIME 10:00 a.m., Pacific Standard Time, on November 6, 2003
LOCATION JDS Uniphase Corporation
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
PROPOSALS 1. To elect two Class II directors to serve until the 2006
Annual Meeting of Stockholders and until their successors are
elected and qualified.
2. To approve the JDS Uniphase Corporation 2003 Equity Incentive
Plan.
3. To ratify the appointment of Ernst & Young LLP as JDS
Uniphase Corporation's independent auditors for the fiscal
year ending June 30, 2004.
4. 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 2003 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 15, 2003.
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/ Kevin J. Kennedy
Kevin J. Kennedy, Ph.D.
Chief Executive Officer
San Jose, California
October 2, 2003
JDS UNIPHASE CORPORATION
1768 Automation Parkway
San Jose, California 95131
(408) 546-5000
---------------------
PROXY STATEMENT
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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 2003 Annual Meeting of Stockholders (the
"Annual Meeting"). The Annual Meeting will be held at the Company's corporate
offices located at 1768 Automation Parkway, San Jose, California 95131, on
November 6, 2003 at 10:00 a.m., Pacific Standard Time. You are invited to
attend the Annual Meeting and are entitled and requested to vote on the
proposals outlined in this proxy statement ("Proxy Statement").
What proposals will be voted on at the Annual Meeting?
There are three proposals scheduled to be voted on at the Annual Meeting:
1. To elect two Class II directors to serve until the 2006 Annual Meeting
of Stockholders and until their successors are elected and qualified;
2. To approve the JDS Uniphase Corporation 2003 Equity Incentive Plan;
and
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 2004.
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 two Class II
directors, "FOR" the adoption of the Company's 2003 Equity Incentive Plan, and
"FOR" the ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 2004.
What is the record date and what does it mean?
The record date for the Annual Meeting is September 15, 2003. 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 ("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, 1,368,572,620 shares of Common Stock were issued and
outstanding, one share of the Company's Special Voting Share was issued and
outstanding, and 66,093,931 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 two 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. Proposals 2 and 3 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, 2 and 3. 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
("ADP") 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 and/or certification of the vote, or (iii) to
facilitate a successful proxy solicitation by the Board of Directors.
2
Occasionally, Stockholders provide written comments on their proxy cards which
are then forwarded to the Company's management.
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 the Annual 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, 2 and 3. 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 Proposals 2 and 3 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 2, 2003. 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.
3
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 2004.
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, 2003 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, November 5, 2003.
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 still may be eligible to vote your shares electronically over the
Internet. A large number of brokerage firms are participating in the 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, which results in cost
savings for the Company. 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.
If you chose 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 over the Internet will remain in effect
until you contact either your broker or the Company to 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 should
contact your broker or the Company.
How can I avoid having duplicate copies of the proxy statements sent to my
household?
Some brokers and other nominee record holders may be participating in the
practice of "householding" proxy statements and annual reports, which results
in cost savings for the Company. The practice of "householding" means that only
one copy of the proxy statement and annual report will be sent to multiple
Stockholders in a Stockholder's household. The Company will promptly deliver a
separate copy of either document to any Stockholder who contacts the Company's
investor relations department at (408) 546-5000 requesting such copies. If a
Stockholder is receiving multiple copies of the proxy statement and annual
report at the Stockholder's household and would like to receive a single copy
of the proxy statement and annual report for a Stockholder's household in the
future, Stockholders should contact their broker, other nominee record holder,
or the Company's investor relations department to request mailing of a single
copy of the proxy statement and annual report.
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, Ph.D.
II Robert E. Enos, Peter A. Guglielmi and 2003 Annual Meeting of Stockholders
Syrus P. Madavi
III Richard T. Liebhaber, Casimir S. Skrzypczak and 2005 Annual Meeting of Stockholders
Jozef Straus, Ph.D.
The Corporate Governance Committee of the Board of Directors has
recommended, and the Board of Directors has nominated, the two nominees named
below for election as Class II directors of the Company, each to serve a
three-year term until the 2006 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 II director of the Company, to serve until his term expires. The Board of
Directors has no reason to believe that either of the nominees will not serve
if elected, but if either 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.
Donald R. Scifres, Ph.D. resigned as a director on January 31, 2003
leaving one vacancy on the Board. The Board appointed Syrus P. Madavi to fill
the vacancy created by Dr. Scifres' resignation.
On August 20, 2003, Mr. Madavi notified the Company that he would be
leaving the Company on a date to be agreed upon by Mr. Madavi and the Board.
Mr. Madavi is not seeking re-election as a director of the Company and his term
will automatically expire at the Annual Meeting.
Dr. Straus retired from his position as Chief Executive Officer of the
Company and Co-Chairman of the Board of Directors effective September 1, 2003,
but will continue to be a member of the Board of Directors.
The Board presented an offer of employment to Kevin J. Kennedy, Ph.D., a
current director of the Company, to assume the position of Chief Executive
Officer effective September 1, 2003. Dr. Kennedy accepted the offer of
employment, and the terms of Dr. Kennedy's employment agreement are described in
the section entitled "Employment Contracts, Termination of Employment and Change
in Control Arrangements."
The Board has amended the Bylaws of the Company to reduce the authorized
number of directors of the Company to eight directors effective upon the day
immediately prior to the Annual Meeting.
Nominees for Three-Year Terms That Will Expire in 2006
Robert E. Enos Mr. Enos became a member of the Company's Board in July 1999 upon the
Age 64 closing of the merger with JDS FITEL Inc. ("JDS FITEL") and was previously
a member of the JDS FITEL Board of Directors from 1996 until July 1999.
Mr. Enos 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.
5
Peter A. Guglielmi Mr. Gulielmi has been a member of the Company's Board since May 1998.
Age 60 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.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION
TO THE BOARD OF EACH OF THE NOMINEES NAMED ABOVE
The Company's directors listed below will continue in office for the
remainder of their terms or earlier in accordance with the Company's Bylaws.
Information regarding the business experience of each such director is provided
below.
Director Whose Term Will Expire in 2003
Syrus P. Madavi Mr. Madavi joined the Company in July 2002 as President and Chief Operating
Age 54 Officer and became a member of the Board in February 2003. Prior to joining
the Company, Mr. Madavi served as Vice President and then Senior Vice
President of Texas Instruments Inc. from August 2000 until April 2002.
Previously Mr. Madavi was President and Chief Executive Officer of Burr-Brown
Corporation from March 1994 until its acquisition by Texas Instruments Inc.
in August 2000. Mr. Madavi also served as chairman of the Board of Burr-
Brown Corporation from 1998 until August 2000. Prior to joining Burr-Brown
Corporation, Mr. Madavi was employed at Raytheon Corporation from 1990
to 1994, where he served as President of the Semiconductor Division during
his final two years. Mr. Madavi also served as Corporate Vice President and
General Manager of Honeywell Signal Processing Technologies from 1984 to
1989. Mr. Madavi holds a B.S.E.E. degree and a M.S. in Computer Science
from Stevens Institute of Technology, and a M.B.A. in Finance from the
University of California at Los Angeles.
Directors Whose Terms Will Expire in 2004
Bruce D. Day Mr. Day became a member of the Company's Board of Directors in July 1999
Age 47 upon the closing of the merger with JDS FITEL 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, taxation and
pensions for Rogers Communications Inc. and its subsidiaries.
Martin A. Kaplan Mr. Kaplan has been a member of the Company's Board of Directors since May
Age 65 1998. Mr. Kaplan has served as the Chairman of the Board since May 2000.
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.
6
Kevin J. Kennedy, Ph.D. Dr. Kennedy became a member of the Company's Board in November 2001,
Age 47 and upon the retirement of Dr. Jozef Straus, became Chief Executive Officer
of the Company on September 1, 2003. From August 2001 to September 2003,
Dr. Kennedy was the Chief Operating Officer of Openwave Systems, Inc. Prior
to joining Openwave Systems Inc., Dr. Kennedy served 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. Dr. Kennedy is also a director of Quantum Corporation, Rambus
Corporation and Openwave Systems, Inc.
Directors Whose Terms Will Expire in 2005
Richard T. Liebhaber Mr. Liebhaber became a member of the Company's Board in November 2001.
Age 68 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 Telecom Ltd.,
ILOG S.A. and Avici Systems, Inc.
Casimir S. Skrzypczak Mr. Skrzypczak has been a member of the Company's Board of Directors since
Age 62 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 Sirenza Microdevices Inc., ECI Telecom Ltd. and Webex
Communications, Inc.
Jozef Straus, Ph.D. Dr. Straus served as Co-Chairman of the Board from July 1999 to September 1,
Age 57 2003 when he resigned his position as Co-Chairman. Dr. Straus continues to
serve as a member of the Board. Dr. Straus served as the Company's Chief
Executive Officer from May 2000 until his retirement on September 1, 2003.
Dr. Straus was also President from June 2001 until July 2002, and was Chief
Operating Officer following the merger with JDS FITEL in July 1999.
Dr. Straus co-founded JDS FITEL in 1981 and served as its Chief Executive
Officer and President from September 1993 until July 1999. Dr. Straus 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.
7
Board Committees and Meetings
During fiscal 2003(1), the Board held eight meetings. The Board has four
committees: Audit Committee, Compensation Committee, Corporate Governance
Committee, and Corporate Development Committee. During fiscal 2003, each of the
committees was comprised solely of non-employee directors. The members of the
committees during fiscal 2003 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, Ph.D......... X Chair
Richard T. Liebhaber .......... X X X
Casimir S. Skrzypczak ......... X Chair X
Effective September 1, 2003, Dr. Kennedy resigned as a member of the
Compensation Committee and as chair of the Corporate Development Committee. Dr.
Kennedy will continue as a member of the Corporate Development Committee.
Richard T. Liebhaber has assumed the position of chair of the Corporate
Development Committee.
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.
The Audit Committee met seven times in fiscal 2003. The Audit Committee is
responsible for assisting the full Board of Directors in fulfilling its
oversight responsibilities relative to the Company's financial statements,
financial reporting practices, systems of internal accounting and financial
controls, the internal audit function, annual independent audits of the
Company's financial statements, and such legal and ethics programs as may
established from time to time by the Board. The Audit Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities, and personnel of the Company and may retain external
consultants at its sole discretion. In addition, the Audit Committee considers
whether the Company's independent auditors' provision of non-audit services is
compatible with maintaining the independence of the independent auditors. The
Audit Committee is composed solely of non-employee directors, as such term is
defined in Rule 16b-3 under the Securities and Exchange Act of 1934, as
amended, all of whom shall satisfy the independence, financial literacy and
experience requirements of Section 10A of the Securities Exchange Act of 1934,
as amended, the Sarbanes-Oxley Act of 2002, rules applicable to NASDAQ-listed
issuers, and any other regulatory requirements.
The charter for the Audit Committee was amended by the Board of Directors
in October 2002. A copy of the Audit Committee charter, as amended to date, is
attached as Appendix A to this Proxy Statement.
The Compensation Committee met nine times in fiscal 2003. The Compensation
Committee of the Board of Directors is responsible for insuring that the
Company adopts and maintains responsible and responsive compensation programs
for its employees, officers and directors consistent with the long-range
interests of stockholders. The Compensation Committee is also responsible for
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
- -------------
(1) 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. The Company's fiscal 2003 year ended on June 28, 2003, whereas fiscal
2002 and 2001 ended on June 29, 2002 and June 30, 2001, respectively. For
comparative presentation purposes, all accompanying tables and notes have
been shown as ended on June 30.
8
plans and equity incentive plans. The Compensation Committee Chairman reports
on the Compensation Committee's actions and recommendations at Board meetings.
In addition, the Compensation Committee has the authority to engage the
services of outside advisors, experts and others to provide assistance as
needed. The Compensation Committee is composed solely of non-employee
directors, as such term is defined in Rule 16b-3 under the Securities and
Exchange Act of 1934, as amended, each of whom must at all times meet all other
applicable federal securities and NASDAQ listing requirements to qualify as an
independent director.
The Corporate Development Committee met five times in fiscal 2003. The
Corporate Development Committee oversees the Company's strategic acquisition
and investment activities. The Corporate Development 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 2003. 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. 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 also employed by 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. In addition, Martin Kaplan
receives $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. Such options granted to
non-employee directors pursuant to the foregoing provisions of the 1993 Plan
have an exercise price equal to 100% of the fair market value of the Company's
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
Company's 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 its
discretion, the Company's Board may make grants of additional options to
non-employee directors. In addition, all non-employee directors who are serving
as chair 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
chair 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 chair for the ensuing year. Such options granted to non-employee
directors serving as a chair have an exercise price equal to 100% of the fair
market value of the Company's 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 chair.
In October 2002, the Company, based upon an analysis performed by Towers
Perrin, an independent consulting firm, revised its compensation policy for
non-employee directors of the Company. Effective
9
November 1, 2002, each non-employee director of the Company receives an annual
cash retainer of $48,000 which is paid in monthly installments of $4,000.
Additionally, each non-employee director receives restricted stock having a
value on the date of grant of $40,000, net of applicable taxes at the
discretion of each non-employee director. In fiscal 2002, since the Company did
not have a stockholder approved plan permitting the issuance of restricted
stock, the restricted stock portion of each non-employee director's
compensation was instead paid in cash, but such cash was required to be
immediately used to purchase shares of the Company's Common Stock on the open
market valued at fair market value at the date of purchase. In each case, such
shares of Common Stock are subject to a restricted stock purchase agreement
which provides for vesting over a three year period. In addition, commencing
with the 2002 annual meeting of stockholders, each non-employee director
serving on a committee of the Board receives an annual cash retainer of $7,500
and each non-employee director serving as a committee chair receives an
additional cash retainer of $6,000. Each continuing non-employee director will
continue to receive an automatic nonqualified stock option grant to purchase
10,000 shares of the Company's Common Stock after each annual meeting of
stockholders and each non-employee director serving as a committee chair will
continue to receive an automatic nonqualified stock option grant of 3,000
shares of the Company's Common Stock upon their initial appointment as a
committee chair and an automatic grant of 3,000 shares of the Company's Common
Stock after each annual meeting of stockholders if the non-employee director
continues as chair for the ensuing year. Such nonqualified options will vest
monthly over twelve months and terminate eight years from the date grant.
Should the Company's Stockholders approve Proposal 2, non-employee directors
will no longer receive an automatic nonqualified stock option grant to purchase
40,000 shares of the Company's Common Stock upon their initial appointment to
the Board. Upon retirement of a non-employee director, all unvested options and
restricted shares of the Company's Common Stock will automatically become fully
vested, and the exercise period for such options would be extended to expire on
the expiration date of such options, which is eight years from the date of
grant.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the Company's directors or
executive officers.
Certain Relationships and Related Transactions
In fiscal 2003, Bruce D. Day, Robert E. Enos, Peter A. Guglielmi, Martin
A. Kaplan, Kevin J. Kennedy, Ph.D., Robert T. Liebhaber and Casimir S.
Skrzypczak were each granted options to purchase 10,000 shares of the Company's
Common Stock at a price of $2.251 per share. In addition, Bruce D. Day, Robert
E. Enos, Kevin J. Kennedy, Ph.D. and Casimir S. Skrzypczak, as committee
chairs, were each granted options to purchase 3,000 shares of the Company's
Common Stock at a price of $2.251 per share, and Martin A. Kaplan was granted a
discretionary stock option to purchase 85,000 shares of the Company's Common
Stock at a price of $3.88.
The Company has entered into certain employment agreements with its Named
Executive Officers (as defined below), Kevin J. Kennedy, Ph.D., Jozef Straus
Ph.D., Syrus P. Madavi, Frederick J. Leonberger, Ph.D., Joseph C. Zils, and
Donald E. Bossi, Ph.D. (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.
10
Executive Officers
The following sets forth certain information regarding the Company's
executive officers as of June 30, 2003:
Name Age Position
- ---- --- --------
Jozef Straus, Ph.D. ........................ 57 Co-Chairman and Chief Executive Officer
Syrus P. Madavi ............................ 54 President and Chief Operating Officer
Donald E. Bossi, Ph.D. ..................... 40 Transmission Group President
Christopher S. Dewees ...................... 39 Senior Vice President and General Counsel
Ronald C. Foster ........................... 52 Executive Vice President and Chief Financial Officer
Frederick J. Leonberger, Ph.D. ............. 55 Senior Vice President and Chief Technology Officer(1)
Stan Lumish, Ph.D. ......................... 46 Chief Technology Officer for Communications
Jo Major, Ph.D. ............................ 41 Senior Vice President, Component Products Group
Mark S. Sobey, Ph.D. ....................... 43 Senior Vice President, Global Sales and Marketing
Joseph C. Zils ............................. 49 Thin Film Products Group President
Jozef Straus served co-chairman of the Board from July 1999 to September
1, 2003 when he resigned his position as co-chairman. Dr. Straus continues to
serve as a member of the Board. Dr. Straus served as the Company's Chief
Executive Officer from May 2000 until his retirement on September 1, 2003. Dr.
Straus was also President from June 2001 until July 2002, and was Chief
Operating Officer following the merger with JDS FITEL in July 1999. 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.
Syrus P. Madavi joined the Company in July 2002 as President and Chief
Operating Officer and became a member of the Board in February 2003. Prior to
joining the Company, Mr. Madavi served as Vice President and then Senior Vice
President of Texas Instruments Inc. from August 2000 until April 2002.
Previously, Mr. Madavi was President and Chief Executive Officer of Burr-Brown
Corporation from March 1994 until its acquisition by Texas Instruments Inc. in
August 2000. Mr. Madavi also served as chairman of the Board of Burr-Brown
Corporation from 1998 until August 2000. Prior to joining Burr-Brown
Corporation, Mr. Madavi was employed at Raytheon Corporation from 1990 to 1994,
where he served as President of the Semiconductor Division during his final two
years. Mr. Madavi also served as Corporate Vice President and General Manager of
Honeywell Signal Processing Technologies from 1984 to 1989. Mr. Madavi holds a
B.S.E.E. degree and a M.S. in Computer Science from Stevens Institute of
Technology, and a M.B.A. in Finance from the University of California at Los
Angeles.
Donald E. Bossi has served as the President of the Company's Transmission
Group since April 2002. From September 2001 to March 2002, Dr. Bossi was
President of the Active Components Group, and from January 1994 to September
2001, Dr. Bossi held various management positions with the Company. Prior to
joining the Company, Dr. Bossi held technical leadership positions with United
Technologies Research Center and MIT Lincoln Laboratory.
Christopher S. Dewees has served as the Company's Senior Vice President
and General Counsel since July 2003. From February 2003 until July 2003, Mr.
Dewees served as Vice President and General Counsel, prior to which he was
Acting General Counsel from October 2002 until February 2003. Mr. Dewees joined
the Company's Legal Department in October 1999. Prior to October 1999, Mr.
Dewees was employed at Morrison & Foerster LLP, where he represented the
Company, and other Silicon Valley public and private
- -------------
(1) Dr. Leonberger retired on June 27, 2003.
11
companies. Mr. Dewees earned his A.B. degree from Dartmouth College in 1986,
and his J.D. degree from Northwestern University in 1989.
Ronald C. Foster joined the Company in February 2003 as Executive Vice
President and Chief Financial Officer. Before joining the Company Mr. Foster
was Chief Financial Officer of Novell Corporation from July 2001 until February
2003, prior to which he served as Novell Corporation's Vice President of
Finance from November 1998 until his promotion to Chief Financial Officer. Mr.
Foster served as Group Controller and then Vice President, Operations
Controller with Applied Materials Corporation from 1996 to 1998, and was
employed as Vice President of Operations at Egghead Software Corporation from
1995 until 1996. Mr. Foster held various finance positions with Hewlett Packard
Corporation ("HP") from 1985 until 1995, culminating in his service as Group
Controller for HP's Computer Manufacturing and Distribution Group. Prior to HP,
Mr. Foster held various finance and operations related positions in the forest
products industry. Mr. Foster holds an M.B.A. degree from the University of
Chicago and a B.A. in Economics from Whitman College.
Frederick J. Leonberger was the Company's Chief Technology Officer from
July 1997 and Senior Vice President from July 1999 until his retirement from
the Company on June 27, 2003. Dr. Leonberger was co-founder and general manager
of Uniphase Telecommunications Products, Inc. ("UTP") and joined the Company
upon the 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 the Company's Chief Technology Officer for
Communications since July 2003. From July 2002 until June 2003, Dr. Lumish
served as the President of the Company's Optical Layer Group. Dr. Lumish joined
the Company 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 joining the Company, Dr. Lumish held management positions with Lucent
Technologies Inc., where he received the Bell Labs Fellow award.
Jo Major has served as the Company's Senior Vice President, Component
Products Group, since July 2003. From September 2002 to July 2003 Dr. Major was
Vice President, Active Components Business Unit. From February 2001, when he
joined the Company as a result of its merger with SDL, Inc., to September 2002,
Dr. Major served in various management roles within the Company's Active
Components Group. Between 1990 and February 2001 Dr. Major was employed by SDL,
Inc., in a variety of technical managerial positions. Dr. Major holds a B.S.,
with high honors, M.S. and Ph.D. from the University of Illinois, and has been
granted industry awards for the development of 980nm lasers, high power
near-infrared lasers, Raman amplifiers and high performance laser packaging.
Dr. Major was an Intel Fellow from 1988 to 1990.
Mark S. Sobey has served as the Company's 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 Dynamics, Inc.
Prior to E-TEK Dynamics, Inc., Dr. Sobey was Vice President/General Manager
with Spectra-Physic, Inc.
Joseph C. Zils has served as the President of the Company's Thin Film
Products Group since March 2000. Prior to the Company's acquisition of Optical
Coating Laboratory, Inc. in February 2000, Mr. Zils served as Vice President,
General Counsel and Corporate Secretary of Optical Coating Laboratory, Inc.
from December 1993 to March 2000. Mr. Zils earned a B.A. in economics from the
University of California, Santa Cruz and a J.D. degree from the University of
San Diego.
12
PROPOSAL NO. 2
APPROVAL OF THE JDS UNIPHASE CORPORATION
2003 EQUITY INCENTIVE PLAN
General
The Company's Stockholders are being asked to approve the adoption of the
Company's 2003 Equity Incentive Plan (the "2003 Plan") as a replacement for the
Company's existing 1993 Plan. If the Company's Stockholders approve the 2003
Plan, no further grants or awards will be issued from the 1993 Plan.
Capitalized terms used in this Proposal No. 2 shall have the same meaning as in
the 2003 Plan unless otherwise indicated. A comparison of material differences
between the provisions of the 1993 Plan and the 2003 Plan are included in table
format below.
The 2003 Plan is intended to enable the Company to attract and retain the
best available personnel, to provide additional incentive to employees,
directors and consultants and to promote the success of the Company's business.
The Board believes that the Company's long term success is dependent upon the
ability of the Company to attract and retain superior individuals who, by
virtue of their ability and qualifications, make important contributions to the
Company.
If approved by the Stockholders, a total of 140,000,000 shares of Common
Stock of the Company will be initially reserved for issuance under the 2003
Plan, subject to adjustment only in the event of a stock split, stock dividend,
or other similar change in the common stock or capital structure of the
Company. The Board's intent is to limit annual potential incremental dilution
attributable to equity incentive awards under the 2003 Plan to at or below a
long-term average of 3%. Accordingly, the Company presently believes that the
number of shares to be reserved for issuance under the 2003 Plan for which
Stockholder approval is being sought will be sufficient for a minimum of three
full years.
Under the 1993 Plan and as of September 1, 2003, there were 70,905,751
shares remaining available for future grants, which will no longer be available
for grants immediately upon Stockholder approval of the 2003 Plan.
Additionally, unlike the 1993 Plan, the 2003 Plan does not contain an
"evergreen provision" whereby the number of shares available for grant under
the 1993 Plan is automatically increased based on a formula set forth in the
1993 Plan. Although initially approved by the Stockholders in 1993, subsequent
amendments to the 1993 Plan, including the adoption of the "evergreen"
provision, have not been, nor were required to be, approved by the Company's
Stockholders.
While the 1993 Plan only provides for the grant of incentive stock options
and nonqualified stock options, the 2003 Plan also provides for the grant of
restricted stock, dividend equivalent rights, stock appreciation rights,
performance units and performance shares. The Board believes that expanding the
type of incentive awards available for issuance under the 2003 Plan will better
enable the Company to attract a broad range of prospective employees and to
more closely tie the vesting of awards under the 2003 Plan to an individual's
and the Company's actual performance. The 2003 Plan contains a listing of 19
performance criteria which the plan administrator may consider and utilize when
granting performance based awards under the 2003 Plan.
The Company believes that equity incentive grants should be broadly based.
Accordingly, the 2003 Plan provides that the maximum number of shares which may
be awarded to Covered Employees as a group in any fiscal year of the Company
shall not exceed 5% of the total number of shares subject to awards issued
during such fiscal year, provided, however, that awards to Covered Employees
made in connection with such Covered Employee's (i) commencement of employment
with the Company or (ii) promotion will not be included for purposes of
calculating whether such limitation has been reached.
The 2003 Plan also (a) imposes a requirement that the exercise price of
stock options and the grant price of stock appreciation rights shall be no less
than 100% of the fair market value of the Company's Common Stock on the date of
the grant, (b) prohibits the granting of options or stock appreciation rights
with terms of longer than eight years, (c) prohibits the repricing of options
(including so-called "6+1" repricings) without
13
stockholder approval, (d) imposes the limitation that no more than 20% of
shares of the Company's Common Stock reserved for issuance under the 2003 Plan
may be utilized for the award of restricted stock, and (e) does not provide for
automatic option grants to non-employee directors (unlike the 1993 Plan).
Comparison of Material Differences Between the Provisions of the 1993 Plan and
the 2003 Plan
Provision 1993 Plan 2003 Plan
- --------- --------- ---------
Automatic plan expiration date No Yes, 10 years unless sooner terminated by the Board
of Directors.
"Evergreen" Provision Yes No
Limits on awards to Covered No Yes, total awards shall not exceed 5% of the total
Employees number of shares subject to awards issued during each
fiscal year, provided, however, that awards to Covered
Employees made in connection with such Covered
Employee's (i) commencement of employment with
the Company or (ii) promotion will not be included for
purposes of calculating whether such limitation has
been reached.
Performance Criteria No Yes, lists 19 performance criteria which the plan
administrator may consider and utilize when granting
performance based awards.
Explicit prohibition on so-called No Yes
"6+1" repricings without
stockholder approval
Prohibition on exercise and grant Yes Yes
prices below 100% of fair market
value of the Company's Common
Stock on grant date
Types of Available Awards Stock options Stock options, restricted stock, dividend equivalent
only rights, stock appreciation rights, performance units and
performance shares
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF
THE 2003 PLAN
A general description of the principal terms of the 2003 Plan as proposed
is set forth below. This description is qualified in its entirety by the terms
of the 2003 Plan, a copy of which is attached to this Proxy Statement as
Appendix B and is incorporated herein by reference.
General Description
Purpose. The purpose of the 2003 Plan is to provide the Company's
employees, directors and consultants, whose present and potential contributions
are important to the success of the Company, an incentive, through ownership of
the Company's Common Stock, to continue in service to the Company, and to help
the Company compete effectively with other enterprises for the services of
qualified individuals.
Shares Reserved for Issuance under the 2003 Plan. If approved by the
Stockholders, a total of 140,000,000 shares of Common Stock will be initially
reserved for issuance under the 2003 Plan, subject to adjustment only in the
event of a stock split, stock dividend, or other similar change in the common
stock or capital structure of the Company. Of the total shares reserved for
issuance under the 2003 Plan, a maximum
14
of 20% of such shares may be awarded as grants of restricted stock. The maximum
number of shares with respect to which awards may be granted to a participant
during a fiscal year of the Company is 3,000,000 shares. In addition, in
connection with a participant's (i) commencement of Continuous Active Service
or (ii) first promotion in any fiscal year of the Company, a participant may be
granted awards for up to an additional 2,000,000 shares which shall not count
against the limit set forth in the previous sentence.
Further, the maximum number of shares which may be awarded to Covered
Employees as a group in any fiscal year of the Company shall not exceed 5% of
the total number of shares subject to awards issued during such fiscal year.
Notwithstanding the preceding sentence, awards to Covered Employees made in
connection with such Covered Employee's (i) commencement of employment with the
Company or (ii) promotion in any fiscal year of the Company (either to a
position which would result in an employee becoming a Covered Employee, or the
promotion of a Covered Employee from one position to another) shall not be
included for purposes of calculating whether such limitation has been reached.
Administration. The 2003 Plan is administered, with respect to grants to
employees, directors, officers, and consultants, by the plan administrator (the
"Administrator"), defined as the Board or one or more committees designated by
the Board. With respect to grants to officers and directors, the committee
shall be constituted in such a manner as to satisfy applicable laws, including
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended
and Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code").
Terms and Conditions of Awards. The 2003 Plan provides for the grant of
stock options, restricted stock, stock appreciation rights, dividend equivalent
rights, performance units and performance shares (collectively referred to as
"awards"). Stock options granted under the 2003 Plan may be either incentive
stock options under the provisions of Section 422 of the Code, or nonqualified
stock options. Incentive stock options may be granted only to employees. Awards
other than incentive stock options may be granted to employees, directors and
consultants. Under the 2003 Plan, awards may be granted to such employees,
directors or consultants who are residing in non-U.S. jurisdictions as the
Administrator may determine from time to time.
Subject to applicable laws, the Administrator has the authority, in its
discretion, to select employees, directors and consultants to whom awards may
be granted from time to time, to determine whether and to what extent awards
are granted, to determine the number of shares of the Company's Common Stock or
the amount of other consideration to be covered by each award (subject to the
limitations set forth under the above section of this Proposal 2 "Shares
Reserved for Issuance under the 2003 Plan"), to approve award agreements for
use under the 2003 Plan, to determine the terms and conditions of any award, to
construe and interpret the terms of the 2003 Plan and awards granted, to
establish additional terms, conditions, rules or procedures to accommodate the
rules or laws of applicable non-U.S. jurisdictions and to take such other
action not inconsistent with the terms of the 2003 Plan as the Administrator
deems appropriate.
Each award granted under the 2003 Plan shall be designated in an award
agreement. In the case of an option, the option shall be designated as either
an incentive stock option or a nonqualified stock option. To the extent that
the aggregate fair market value of shares of the Company's Common Stock subject
to options designated as incentive stock options which become exercisable for
the first time by a participant during any calendar year exceeds $100,000, such
excess options shall be treated as nonqualified stock options.
The term of any award granted under the 2003 Plan may not be for more than
eight years (or five years in the case of incentive stock options granted to
any participant who owns stock representing more than 10% of the combined
voting power of the Company or any parent or subsidiary of the Company).
The 2003 Plan authorizes the Administrator to grant options at an exercise
price not less than 100% of the fair market value of the common stock on the
date the option is granted (or 110%, in the case of incentive stock options
granted to any employee who owns stock representing more than 10% of the
combined voting power of the Company or any parent or subsidiary of the
Company). The exercise price of awards intended to qualify as performance-based
compensation for purposes of Section 162(m) of the Code shall not be less
15
than 100% of the fair market value of the common stock on the date the award is
granted. In the case of a stock appreciation right, the base amount on which
the stock appreciation is calculated shall be not less than 100% of the fair
market value of the common stock on the date of grant. The exercise price is
generally payable in cash, check, shares of common stock or with respect to
options, payment through a broker-dealer sale and remittance procedure.
Under the 2003 Plan, the Administrator may establish one or more programs
under the 2003 Plan to permit selected grantees the opportunity to elect to
defer receipt of consideration payable under an award. The Administrator also
may establish under the 2003 Plan separate programs for the grant of particular
forms of awards to one or more classes of grantees. The awards may be granted
subject to vesting schedules and restrictions on transfer and repurchase or
forfeiture rights in favor of the Company as specified in the award agreements
to be issued under the 2003 Plan.
Termination of Service. An award may not be exercised after the
termination date of such award as set forth in the award agreement. In the
event a participant in the 2003 Plan terminates continuous active service with
the Company, an award may be exercised only to the extent provided in the award
agreement. Where an award agreement permits a participant to exercise an award
following termination of service, the award shall terminate to the extent not
exercised on the last day of the specified period or the last day of the
original term of the award, whichever comes first. Any award designated as an
incentive stock option, to the extent not exercised within the time permitted
by law for the exercise of incentive stock options following the termination of
employment, shall convert automatically to a nonqualified stock option and
thereafter shall be exercisable as such to the extent exercisable by its terms
for the period specified in the award agreement.
Transferability of Awards. Under the 2003 Plan, incentive stock options
may not be sold, pledged, assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of descent or distribution and may
be exercised during the lifetime of the participant only by the participant.
Other awards shall be transferable only by will or by the laws of descent or
distribution and to the extent provided in the award agreement. The 2003 Plan
permits the designation of beneficiaries by holders of awards, including
incentive stock options.
Section 162(m) of the Code. The maximum number of shares with respect to
which awards may be granted to a participant during a fiscal year of the
Company is 3,000,000 shares. In addition, in connection with a participant's
(i) commencement of Continuous Active Service or (ii) first promotion in any
fiscal year of the Company, a participant may be granted awards for up to an
additional 2,000,000 shares which shall not count against the limit set forth
in the previous sentence. The foregoing limitations shall be adjusted
proportionately by the Administrator in connection with any change in the
Company's capitalization due to a stock split, stock dividend or similar event
affecting the common stock of the Company and its determination shall be final,
binding and conclusive. Under Code Section 162(m) no deduction is allowed in
any taxable year of the Company for compensation in excess of $1 million paid
to a Covered Employee. An exception to this rule applies to compensation that
is paid pursuant to a stock incentive plan approved by stockholders and that
specifies, among other things, the maximum number of shares with respect to
which options and stock appreciation rights may be granted to eligible
participants under such plan during a specified period. Compensation paid
pursuant to options or stock appreciation rights granted under such a plan and
with an exercise price equal to the fair market value of the Company's Common
Stock on the date of grant is deemed to be inherently performance-based, since
such awards provide value to participants only if the stock price appreciates.
To the extent required by Section 162(m) of the Code or the regulations
thereunder, in applying the foregoing limitation, if any option or stock
appreciation right is canceled, the cancelled award shall continue to count
against the maximum number of shares of Common Stock with respect to which an
award may be granted to a participant.
In order for stock based awards other than options and stock appreciation
rights to qualify as performance-based compensation, the Administrator must
establish a performance goal with respect to such award in writing not later
than 90 days after the commencement of the services to which it relates and
while the outcome is substantially uncertain. In addition, the performance goal
must be stated in terms of an objective formula or
16
standard. The 2003 Plan contains a list of performance criteria that may be
considered by the Administrator when granting performance-based awards.
Change in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of common stock covered by
outstanding awards, the number of shares of common stock that have been
authorized for issuance under the 2003 Plan, the exercise or purchase price of
each outstanding award, the maximum number of shares of common stock that may
be granted subject to awards to any participant in a fiscal year, and the like,
shall be proportionally adjusted by the Administrator in the event of (i) any
increase or decrease in the number of issued shares of common stock resulting
from a stock split, stock dividend, combination or reclassification or similar
event affecting the common stock of the Company, (ii) any other increase or
decrease in the number of issued shares of common stock effected without
receipt of consideration by the Company or (iii) as the Administrator may
determine in its discretion, any other transaction with respect to common stock
including a corporate merger, consolidation, acquisition of property or stock,
separation (including a spin-off or other distribution of stock or property),
reorganization, liquidation (whether partial or complete) or any similar
transaction; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator and its
determination shall be final, binding and conclusive.
Corporate Transaction. Effective upon the consummation of a corporate
transaction (as described below), all outstanding awards shall terminate.
However, all such awards shall not terminate to the extent the contractual
obligations represented by the award are assumed by the successor entity. In
the event an outstanding award is not assumed or replaced by the successor
entity in connection with a corporate transaction, the award shall
automatically become fully vested and exercisable for all of the shares at the
time represented by the award, immediately prior to the specified effective
date of such corporate transaction. A corporate transaction includes (i) the
sale of all or substantially all of the Company's assets, (ii) the complete
dissolution or liquidation of the Company, (iii) a merger or consolidation in
which the Company is not the surviving entity, (iv) any reverse merger in which
the Company is the surviving entity but in which securities possessing more
than 40% of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those who held
such securities immediately prior to such merger, or (v) the acquisition in a
single or series of related transactions by any person or related group of
persons of beneficial ownership of securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities.
Amendment, Suspension or Termination of the 2003 Plan. The Board may at
any time amend, suspend or terminate the 2003 Plan. The 2003 Plan will
terminate ten years from the date of its approval by the Company's
stockholders, unless terminated earlier by the Board. To the extent necessary
to comply with applicable provisions of federal securities laws, state
corporate and securities laws, the Code, the rules of any applicable stock
exchange or national market system, and the rules of any non-U.S. jurisdiction
applicable to awards granted to residents therein, the Company shall obtain
stockholder approval of any such amendment to the 2003 Plan in such a manner
and to such a degree as required.
Certain Federal Tax Consequences
The following summary of the federal income tax consequences of 2003 Plan
transactions is based upon federal income tax laws in effect on the date of
this proxy statement. This summary does not purport to be complete, and does
not discuss, state, local or non-U.S. tax consequences.
Nonqualified Stock Options. The grant of a nonqualified stock option under
the 2003 Plan will not result in any federal income tax consequences to the
participant or to the Company. Upon exercise of a nonqualified stock option,
the participant is subject to income taxes at the rate applicable to ordinary
compensation income on the difference between the option exercise price and the
fair market value of the shares on the date of exercise. This income is subject
to withholding for federal income and employment tax purposes. The Company is
entitled to an income tax deduction in the amount of the income recognized by
the participant, subject to possible limitations imposed by Section 162(m) of
the Code and so long as the Company withholds the
17
appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount. Any gain or
loss on the participant's subsequent disposition of the shares of common stock
will receive long or short-term capital gain or loss treatment, depending on
whether the shares are held for more than one year following exercise. The
Company does not receive a tax deduction for any such gain.
Incentive Stock Options. The grant of an incentive stock option under the
2003 Plan will not result in any federal income tax consequences to the
participant or to the Company. A participant recognizes no federal taxable
income upon exercising an incentive stock option (subject to the alternative
minimum tax rules discussed below), and the Company receives no deduction at
the time of exercise. The Internal Revenue Service has issued proposed
regulations that would subject participants to withholding at the time
participants exercise an incentive stock option for Social Security and
Medicare taxes (but not income tax) based upon the excess of the fair market
value of the shares on the date of exercise over the exercise price. These
proposed regulations, if adopted, would be effective only for the exercise of
an incentive stock option that occurs two years after the regulations are
issued in final form. In the event of a disposition of stock acquired upon
exercise of an incentive stock option, the tax consequences depend upon how
long the participant has held the shares of common stock. If the participant
does not dispose of the shares within two years after the incentive stock
option was granted, nor within one year after the incentive stock option was
exercised, the participant will recognize a long-term capital gain (or loss)
equal to the difference between the sale price of the shares and the exercise
price. The Company is not entitled to any deduction under these circumstances.
If the participant fails to satisfy either of the foregoing holding
periods, he or she must recognize ordinary income in the year of the
disposition (referred to as a "disqualifying disposition"). The amount of such
ordinary income generally is the lesser of (i) the difference between the
amount realized on the disposition and the exercise price or (ii) the
difference between the fair market value of the stock on the exercise date and
the exercise price. Any gain in excess of the amount taxed as ordinary income
will be treated as a long or short-term capital gain, depending on whether the
stock was held for more than one year. The Company, in the year of the
disqualifying disposition, is entitled to a deduction equal to the amount of
ordinary income recognized by the participant, subject to possible limitations
imposed by Section 162(m) of the Code and so long as the Company withholds the
appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount.
The "spread" under an incentive stock option -- i.e., the difference
between the fair market value of the shares at exercise and the exercise price
- -- is classified as an item of adjustment in the year of exercise for purposes
of the alternative minimum tax.
Restricted Stock. The grant of restricted stock will subject the recipient
to ordinary compensation income on the difference between the amount paid for
such stock and the fair market value of the shares on the date that the
restrictions lapse. This income is subject to withholding for federal income
and employment tax purposes. The Company is entitled to an income tax deduction
in the amount of the ordinary income recognized by the recipient, subject to
possible limitations imposed by Section 162(m) of the Code and so long as the
Company withholds the appropriate taxes with respect to such income (if
required) and the participant's total compensation is deemed reasonable in
amount. Any gain or loss on the recipient's subsequent disposition of the
shares will receive long or short-term capital gain or loss treatment depending
on how long the stock has been held since the restrictions lapsed. The Company
does not receive a tax deduction for any such gain.
Recipients of restricted stock may make an election under Section 83(b) of
the Code ("Section 83(b) Election") to recognize as ordinary compensation
income in the year that such restricted stock is granted, the amount equal to
the spread between the amount paid for such stock and the fair market value on
the date of the issuance of the stock. If such an election is made, the
recipient recognizes no further amounts of compensation income upon the lapse
of any restrictions and any gain or loss on subsequent disposition will be long
or short-term capital gain to the recipient. The Section 83(b) Election must be
made within thirty days from the time the restricted stock is issued.
Stock Appreciation Rights, Performance Shares and Performance
Units. Recipients of stock appreciation rights ("SARs"), performance shares and
performance units generally should not recognize income until such
18
rights are exercised (assuming there is no ceiling on the value of the right).
Upon exercise, the participant will normally recognize taxable ordinary income
for federal income tax purposes equal to the amount of cash and fair market
value the shares, if any, received upon such exercise. Participants who are
employees will be subject to withholding for federal income and employment tax
purposes with respect to income recognized upon exercise of an SAR, performance
share or performance unit. Participants will recognize gain upon the
disposition of any shares received on exercise of an SAR, performance share or
performance unit equal to the excess of (i) the amount realized on such
disposition over (ii) the ordinary income recognized with respect to such
shares under the principles set forth above. That gain will be taxable as long
or short-term capital gain depending on whether the shares were held for more
than one year.
The Company will be entitled to a tax deduction to the extent and in the
year that ordinary income is recognized by the participant, subject to possible
limitations imposed by Section 162(m) of the Code and so long as the Company
withholds the appropriate taxes with respect to such income (if required) and
the participant's total compensation is deemed reasonable in amount.
Dividends and Dividend Equivalents. Recipients of stock-based awards that
earn dividends or dividend equivalents will recognize taxable ordinary income
on any dividend payments received with respect to unvested shares subject to
such awards, which income is subject to withholding for federal income and
employment tax purposes. The Company is entitled to an income tax deduction in
the amount of the income recognized by a participant, subject to possible
limitations imposed by Section 162(m) of the Code and so long as the Company
withholds the appropriate taxes with respect to such income (if required) and
the individual's total compensation is deemed reasonable in amount.
New Plan Benefits
As of the date of this Proxy Statement, no outside director and no
associate of any director or officer has been granted any awards subject to
Stockholder approval of the proposed 2003 Plan. Because the Administrator will
make future awards at its discretion, the Company cannot determine the number
of options and other awards that may be awarded in the future to eligible
participants. However, subject to his achievement of such performance goals as
shall be determined by the Board, the Company intends to grant stock options to
acquire a total of at least 1,500,000 shares to Kevin J. Kennedy over the
approximately 18 month period following the date of his appointment as Chief
Executive Officer of the Company, 1,000,000 shares of which will be granted
within the first 12 months of such appointment. In addition, the estimated
annual awards that will be received by non-employee directors under the 2003
Plan are shown in the table below.
The following table shows the estimated awards to be issued under the 2003
Plan to:
o The named executive officers;
o All current executive officers as a group;
o All current directors who are not executive officers; and
o All employees as a group (excluding executive officers).
In the event the 2003 Plan is not approved by the stockholders of the
Company, the estimated awards set forth in the following table will not be
issued under the 2003 Plan.
19
2003 Equity Incentive Plan
Name And Position Dollar Value ($) Number of Shares
- ----------------- ---------------- ----------------
Kevin J. Kennedy, Ph.D. .......................................... $ 0 1,500,000 (1)
Chief Executive Officer
All current executive officers as a group (5 persons) ............ $ 0 1,500,000 (1)
All current directors who are not executive officers, as a $ 240,000 (2) 141,364 (3)(4)
group (6 persons) ..............................................
All employees as a group (excluding executive officers) .......... $ 0 0
- -------------
(1) Represents options to acquire a total of at least 1,500,000 shares that,
subject to Board approval, may be granted to Kevin J. Kennedy over the
approximately 18 month period following the date of his appointment as
Chief Executive Officer of the Company, of which 1,000,000 may be granted
within the first twelve months following such employment.
(2) Represents the combined value of restricted stock to be issued to each
non-employee director under the 2003 Plan.
(3) Includes an estimated 69,364 shares of restricted stock to be purchased by
non-employee directors under the 2003 Plan using each non-employee
director's remaining retainer of $40,000 and assuming a purchase price of
$3.46 per share (which was the fair market value of the Company's Common
Stock at the end of the 2003 fiscal year on June 28, 2003).
(4) Includes an estimated 72,000 shares subject to stock options to be granted
under the 2003 Plan annually to non-employee directors based on (a) a
grant of 10,000 shares to each non-employee director made after each
annual meeting of stockholders and (b) with respect to non-employee
directors serving as chair of one of the committees of the Board, a grant
of 3,000 shares to each non-employee director upon their initial
appointment as chair and a grant of 3,000 shares after each annual meeting
of stockholders if the non-employee director continues as chair for the
ensuing year. The Board has four committees: Audit Committee, Compensation
Committee, Corporate Governance Committee, and Corporate Development
Committee. The Board has the discretion to increase or decrease the number
of stock options granted to non-employee directors on an annual basis.
20
PROPOSAL 3
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, 2004. 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 of Ernst &
Young LLP as the Company's independent auditors, 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 $4,320,000 for the year ended June
30, 2003. 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 was $2,460,000.
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, was $1,860,000, of which $510,000 was
related to audit-related services and $1,350,000 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 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, 2004
21
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 15, 2003, 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 "Compensation of
Executive Officers" section below), and (iv) all current directors and
executive officers as a group.
As of August 15, 2003, 1,368,174,998 shares of the Company's Common Stock
were outstanding, and 66,093,931 Exchangeable Shares were outstanding. As of
August 15, 2003, no person beneficially owned more than five percent (5%) or
more the Company's Common Stock including Exchangeable Shares. The amounts and
percentages of Common Stock beneficially owned are reported on the basis of
regulations of the Securities and Exchange Commission ("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
- ---- ------------ -----------
Directors and Named Executive Officers
Jozef Straus, Ph.D.(1) ................................................... 10,488,542 *
Frederick J. Leonberger(2) ............................................... 1,930,360 *
Joseph C. Zils(3) ........................................................ 679,835 *
Bruce D. Day(4) .......................................................... 641,448 *
Donald E. Bossi, Ph.D(5) ................................................. 575,694 *
Robert E. Enos(6) ........................................................ 575,320 *
Martin A. Kaplan(7) ...................................................... 483,959 *
Stan Lumish, Ph.D(8) ..................................................... 419,144 *
Syrus P. Madavi(9) ....................................................... 400,000 *
Casmir S. Skrzypczak(10) ................................................. 338,415 *
Peter A. Guglielmi(11) ................................................... 294,666 *
Richard T. Liebhaber(12).................................................. 46,971 *
Kevin J. Kennedy, Ph.D.(13) .............................................. 44,471 *
All directors and executive officers as a group (17 persons)(14) ......... 17,802,432 1.2%
- -------------
* Less than 1%.
(1) Includes 10,485,452 shares subject to stock options currently exercisable
or exercisable within 60 days of August 15, 2003
(2) Includes 1,915,551 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003
(3) Includes 663,191 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(4) Includes 609,012 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003, and 12,200 shares issuable
upon exchange of the Exchangeable Shares of JDS Uniphase Canada Ltd.
(5) Includes 553,872 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
22
(6) Includes 547,988 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003, and 12,000 shares issuable
upon exchange of the Exchangeable Shares of JDS Uniphase Canada Ltd.
(7) Includes (i) 472,499 shares subject to stock options currently exercisable
or exercisable within 60 days of August 15, 2003, (ii) 1,600 shares held by
Mr. Kaplan's children, and (iii) 260 shares held by Mr. Kaplan's spouse.
(8) Includes 418,525 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(9) Includes 400,000 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(10) Includes 324,916 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(11) Includes 271,166 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(12) Includes 34,721 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(13) Includes 37,471 shares subject to stock options currently exercisable or
exercisable within 60 days of August 15, 2003.
(14) Includes 17,461,117 shares subject to stock options currently exercisable
or exercisable within 60 days of August 15, 2003, and 24,200 shares
issuable upon exchange of the Exchangeable Shares of JDS Uniphase Canada
Ltd.
23
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning compensation
of (i) each person that served as the Chief Executive Officer of the Company
during the fiscal year ended June 30, 2003, (ii) the four other most highly
compensated Executive Officers of the Company whose aggregate cash compensation
exceeded $100,000 during the fiscal year ended June 30, 2003, and (iii) up to
two former executive officers of the Company who would have been one of the
Company's four most highly compensated officers had such officer been serving
as such at end of the Company's fiscal year ending June 30, 2003 (collectively,
the "Named Executive Officers"):
Long-Term
Annual Compensation Compensation All
------------------------------------------------ Securities Other
Fiscal Bonus and Underlying Compensation
Name and Principal Position Year(1) Salary($)(2) Commission($)(3) Options(#) ($)(4)
- --------------------------- --------- -------------------- ------------------ -------------- ------------------
Jozef Straus, Ph.D.(5) .................... 2003 $ 544,440(US) 750,000 $ 4,812(US)
Co-Chairman and Chief 734,994(CDN) 6,502(CDN)
Executive Officer 2002 505,763(US) -- 1,400,000 4,591(US)
743,471(CDN) -- 6,750(CDN)
2001 521,355(US) -- 300,000 --
782,033(CDN) --
Syrus P. Madavi(6) ........................ 2003 377,596 -- 2,100,000 --
President and Chief --
Operating Officer
Frederick J. Leonberger, Ph.D.(7) ......... 2003 274,320 -- -- 3,400
Chief Technology Officer 2002 225,000 -- 170,000 3,425
2001 224,083 95,721 210,200 4,701
Joseph C. Zils ............................ 2003 274,234 -- 275,000 3,600
Thin Film Products Group 2002 245,192 25,010 297,000 --
President 2001 250,004 282,693 190,000 --
Donald E. Bossi, Ph.D. .................... 2003 245,195 -- 250,000 3,600
Transmission Group President 2002 223,629 -- 225,000 3,706
2001 201,704 43,136 225,250 4,574
Stan Lumish, Ph.D.(8) ..................... 2003 242,308 -- 225,000 3,077
Chief Technology Officer -- 2002 204,230 -- 155,000 3,069
Communications 2001 159,614 18,000 266,250 --
- -------------
(1) Compensation reported for fiscal years ending June 30, 2003, 2002 and 2001.
(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 $l.35 = 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. Leonberger, Mr.
Zils, Dr. Bossi, and Dr. Lumish under its 401(k) plan, and (ii) Dr. Straus
under the Company's group retirement savings plan for Canadian employees.
24
(5) Dr. Straus resigned from his position as Co-Chairman and Chief Executive
Officer effective September 1, 2003.
(6) Mr. Madavi will resign from his position as President and Chief Operating
Officer on a date to be agreed upon by Mr. Madavi and the Company.
(7) Dr. Leonberger retired from his position with the Company on June 27, 2003.
(8) Mr. Lumish joined the Company in February 2000.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
The Company and Kevin J. Kennedy, Ph.D. are parties to an employment
agreement dated August 18, 2003 (the "Kennedy Agreement"). The term of the
Kennedy Agreement commenced on September 1, 2003 and expires on August 31,
2007, unless sooner terminated pursuant to the terms of the Kennedy Agreement.
Dr. Kennedy's current annual base salary under the Kennedy Agreement is
$500,000, subject to adjustment from time to time by the Company. The Kennedy
Agreement provides that on the first anniversary of the Kennedy Agreement, Dr.
Kennedy's base annual salary will be increased to a minimum of $575,000. In
addition, Dr. Kennedy is eligible to earn an annual bonus with a target bonus
of 100% of his annual base salary and a maximum bonus of up to 200% of his base
salary, based upon achievement of objectives determined by the Company from
time to time. The Kennedy Agreement provides for, and Dr. Kennedy received, a
one-time new hire bonus of $500,000 and a one-time stock purchase bonus of
$250,000 (grossed up for applicable deductions and withholdings) to purchase
shares of the Company's Common Stock. Such shares of Common Stock are subject
to a restricted stock agreement which provides for vesting after six months of
employment as Chief Executive Officer of the Company. Dr. Kennedy further
received pursuant to the Kennedy Agreement an option to purchase 2,000,000
shares of the Company's Common Stock at an exercise price equal to the fair
market value at the date of grant and, subject to achieving certain performance
goals determined by the Board, Dr. Kennedy will receive options to purchase a
minimum of 1,500,000 shares of the Company's Common Stock over the 18 month
period following his commencement of service as Chief Executive Officer,
1,000,000 of which shares will be granted within 12 months of Dr. Kennedy's
commencement of employment. The Kennedy Agreement also provides for 24 months
medical insurance coverage upon termination of the Kennedy Agreement. Further,
in the event the Kennedy Agreement is terminated (i) by the Company without
cause (as that term is defined in the Kennedy Agreement); (ii) as a result of
the death or disability of Dr. Kennedy; or (iii) by Dr. Kennedy for good reason
(as that term is defined in the Kennedy Agreement), Dr. Kennedy shall receive
(a) payment of severance in the amount of three years' salary and three years'
bonus based upon previous bonuses paid to Dr. Kennedy if employment is
terminated prior to the second anniversary of the Kennedy Agreement, or if
termination follows a change of control of the Company, (b) payment of
severance in the amount of two years' salary and two years' bonus based upon
previous bonuses paid to Dr. Kennedy if employment is terminated after the
second anniversary of the Kennedy Agreement, and (c) partial acceleration of
vesting of Dr. Kennedy's options. If termination of employment occurs prior to
the completion of two or three years of employment, the bonus portion of the
severance payment will be calculated in accordance with the terms of the
Kennedy Agreement.
The Company and Jozef Straus, Ph.D. 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 $544,440 ($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 in fiscal 2003. 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 good reason
(as that term is defined in the Straus Agreement). The Company and Dr. Straus
have also entered into an agreement
25
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. On August 20, 2003, the Company and Dr. Straus entered into a
Transition and Retirement Agreement (the "Transition Agreement") pursuant to
which and effective September 1, 2003 (i) Dr. Straus retired from his position
as the Company's Chief Executive Officer and assumed a new role as Founder
Emeritus and Advisor to the Chief Executive Officer, and (ii) resigned from his
position as Co-Chairman of the Board of Directors (but remained a member of the
Board). During the term of the Transition Agreement, Dr. Straus will continue
to receive his regular salary and will remain eligible for a target bonus. The
Transition Agreement also amends the Straus Agreement to provide that upon the
latter of (i) the termination of Dr. Straus' employment, and (ii) the
termination of Dr. Straus' service as a member of the Company's Board of
Directors, Dr. Straus' then vested stock options shall remain exercisable for
the full remaining portion of their eight year term.
The Company and Syrus P. Madavi are parties to an employment agreement
dated July 24, 2002 (the "Madavi Agreement"). The term of the Madavi Agreement
expires on July 31, 2007, unless sooner terminated pursuant to the terms of the
Madavi Agreement. Mr. Madavi's current annual base salary under the Madavi
Agreement is $425,000, subject to adjustment from time to time by the Company.
In addition, Mr. Madavi is eligible to earn an annual bonus for senior
executives with a target bonus of 80% of his annual base salary and a maximum
bonus of up to 200% of his target bonus, based upon achievement of objectives
determined by the Company from time to time. However, no bonus was paid in
fiscal 2003. Mr. Madavi further received pursuant to the Madavi Agreement an
option to purchase 1,600,000 shares of the Company's Common Stock at an
exercise price equal to the fair market value at the date of grant. The Madavi
Agreement also provides for (i) payment of severance in the amount of three
years' salary and bonus based upon previous bonuses paid to Mr. Madavi, (ii) 24
months medical insurance coverage, and (iii) acceleration of vesting of Mr.
Madavi's options in the event the Madavi Agreement is terminated (a) by the
Company without cause (as that term is defined in the Madavi Agreement); (b) as
a result of the death or disability of Mr. Madavi; or (c) by Mr. Madavi for
good reason (as that term is defined in the Madavi Agreement). If termination
of employment occurs prior to the completion of three years of employment, the
bonus will be calculated at 80% of Mr. Madavi's base salary. The Company and
Mr. Madavi entered into a Transition Agreement (the "Transition Agreement") on
July 30, 2003, pursuant to which the Madavi Agreement was amended to provide
that upon termination of Mr. Madavi's employment for any reason other than for
cause (as such term is defined in the Madavi Agreement) (i) Mr. Madavi shall be
entitled to the severance benefits provided in the Madavi Agreement, and (ii)
stock options granted to Mr. Madavi in November 2002 shall be exercisable for
the remaining portion of their eight year term.
The Company and Frederick J. Leonberger, Ph.D. are parties to an
employment agreement dated July 6, 1999 (the "Leonberger Agreement"). The term
of the Leonberger Agreement expires on July 6, 2004, unless sooner terminated
pursuant to the terms of the Leonberger Agreement. Dr. Leonberger's current
base salary under the Leonberger Agreement is $274,320, subject to adjustment
from time to time by the Company. In addition, Dr. Leonberger is eligible to
earn an annual bonus in an amount up to 40% 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 2003. The Leonberger Agreement also
provides for payment of severance in the amount of three years' salary plus a
bonus based upon previous bonuses paid to Dr. Leonberger and partial
acceleration of vesting of Dr. Leonberger's options in the event the Leonberger
Agreement is terminated (i) by the Company without cause (as that term is
defined in the Leonberger Agreement); (ii) as a result of the death or
disability of Dr. Leonberger; or (iii) by Dr. Leonberger for good reason (as
that term is defined in the Leonberger Agreement). The Company and Dr.
Leonberger entered into a letter agreement (the "Letter Agreement") dated March
12, 2003 modifying the Leonberger Agreement to provide that upon Dr.
Leonberger's retirement from the Company, the Leonberger Agreement terminated
and Dr. Leonberger will receive (i) payment of medical insurance for a period
of 18 months, and (ii) acceleration of stock options previously granted which
would have vested between Dr. Leonberger's retirement date of June 27, 2003 and
July 6, 2004, all of which such vested stock options will remain exercisable
for the full remaining portion of their eight year term.
26
The Company and Joseph C. Zils are parties to an employment agreement
dated December 1, 2001 (the "Zils Agreement"). The term of the Zils Agreement
expires on November 9, 2005, unless sooner terminated pursuant to the terms of
the Zils Agreement. Mr. Zils' current annual base salary under the Zils
Agreement is $274,234, subject to adjustment from time to time by the Company.
In addition, Mr. Zils is eligible to earn an annual bonus in an amount up to
50% 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 2003.
The Zils Agreement also provides for payment of severance in the amount of
$1,090,702.38 and acceleration of vesting of stock options granted to Mr. Zils'
in December 2001 in the event the Zils Agreement is terminated (i) by the
Company without cause (as that term is defined in the Zils Agreement); (ii) as
a result of the death or disability of Mr. Zils; or (iii) by Mr. Zils for good
reason (as that term is defined in the Zils Agreement).
The Company and Donald E. Bossi, Ph.D. are parties to an employment
agreement dated September 29, 1999 (the "Bossi Agreement"). The term of the
Bossi Agreement expires on July 6, 2004, unless sooner terminated pursuant to
the terms of the Bossi Agreement. Dr. Bossi's current base salary under the
Bossi Agreement is $245,195, subject to adjustment from time to time by the
Company. In addition, Dr. Bossi is eligible to earn an annual bonus in an
amount up to 50% 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 2003. The Bossi Agreement also provides for payment of
severance in the amount of one years' salary plus a bonus based upon previous
bonuses paid to Dr. Bossi and partial acceleration of vesting of Dr. Bossi's
previously granted stock options in the event the Bossi Agreement is terminated
(i) by the Company without cause (as that term is defined in the Bossi
Agreement); (ii) as a result of the death or disability of Dr. Bossi; or (iii)
by Dr. Bossi for good reason (as that term is defined in the Bossi Agreement).
Stock 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, 2003:
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) 2003(2) Share(3) Date 5% 10%
- ---- ------------ ------------ ----------- ----------- -------------- --------------
Jozef Straus, Ph.D. ................ 750,000 2.89% $ 3.31 11/24/10 $ 1,185,283 $ 2,838,959
Syrus Madavi ....................... 1,600,000 6.17% 2.14 07/25/10 1,634,807 3,915,648
500,000 1.93% 3.31 11/24/10 790,189 1,892,639
Frederick J. Leonberger, Ph.D. ..... -- -- -- -- -- --
Joseph C. Zils ..................... 25,000 0.10% 2.53 07/30/10 30,199 72,332
250,000 0.96% 2.75 11/18/10 328,251 786,217
Donald E. Bossi, Ph.D. ............. 50,000 0.19% 2.53 07/30/10 60,398 144,664
200,000 0.77% 2.75 11/18/10 262,600 628,974
Stan Lumish, Ph.D. ................. 50,000 0.19% 2.53 07/30/10 60,398 144,664
175,000 0.67% 2.75 11/18/10 229,775 550,352
- -------------
(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 25,936,439 options granted to the Company's employees
in fiscal 2003, 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
27
(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 Stock 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 2003, 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, 2003 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:
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares June 30, 2003 June 30, 2003(2)
Acquired on Value ----------------------------- -----------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ------------- ------------- ------------- --------------- ------------- --------------
Jozef Straus, Ph.D. .............. -- -- 9,778,369 2,419,583 -- $ 113,250
Syrus P. Madavi .................. -- -- -- 2,100,000 -- 2,189,100
Frederick J. Leonberger, Ph.D. ... -- -- 1,915,551 -- $ 112,326 --
Joseph C. Zils ................... -- -- 617,129 587,813 -- 201,025
Donald E. Bossi, Ph.D. ........... -- -- 512,607 496,963 1,381 188,750
Stan Lumish, Ph.D. ............... -- -- 367,187 479,063 -- 170,975
- -------------
(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 28, 2003, which was $3.46 per
share.
28
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, 2003.
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(1)(2) ..................... 5,966 $ 0.24 39,193,743
Equity compensation plans
Not approved by security 94,145,825 18.43 91,249,684
holders(3)(5) ..................... ---------- ------ -----------
Total/Weighted Ave./Total ......... 94,151,791 $18.43 130,443,427
---------- ------ -----------
- -------------
(1) Represents shares of the Company's Common Stock issuable upon exercise of
options outstanding under the following equity compensation plan: 1982
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, 2003, options and rights to purchase an aggregate of
25,996,246 shares of the Company's Common Stock at a weighted average
exercise price of $30.87 were outstanding under the following equity
compensation plans, which options and rights were assumed in connection
with the following merger and acquisition transactions: Uniphase
Telecommunications, Inc. 1995 Flexible Stock Incentive Plan; JDS FITEL 1994
and 1996 Stock Option Plans; Broadband Communications Products, Inc. 1992
Key Employee Incentive 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; Cronos Integrated Microsystems, Inc. 1999 Stock Plan;
E-TEK Dynamics, Inc. 1997 Equity Incentive Plan, and 1998 Stock Plan;
Optical Process Automation, Inc. 2000 Stock Option and Incentive Plan, 2000
Series B Preferred Stock Option Plan, SDL, Inc. 1995 Stock Option Plan;
1992 SDL-Spectra Diode Stock Option 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 the assumed
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.
29
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 Plan was adopted by the Board of Directors in August 1993 and was
approved by the Company's stockholders in October 1993. Amendments 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.
On July 30, 2003 the Board of Directors adopted a resolution to terminate
the 1993 Plan effective upon Stockholder approval of the proposed 2003 Plan
(Proposal 2). Upon termination of the 1993 Plan, no new awards will be issued.
The 1993 Plan is administered by the Compensation Committee. Pursuant to
the 1993 Plan, the Compensation Committee may grant nonqualified 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
nonqualified stock options in the future under the 1993 Plan.
An aggregate of 222,664,548 shares have 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 shall be 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 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" shall mean 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 nonqualified 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
30
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
chair 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
chair 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 chair for the ensuing year. Such options granted to non-employee
directors serving as a committee chair vest over twelve months, with vesting to
cease if the non-employee director no longer continues to serve as chair.
All nonqualified 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 1993 Plan shall not
exceed eight 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.
If the 2003 Plan is approved by the Company's Stockholders, no further
awards will be made under the 1993 Plan.
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 nonqualified stock options only to employees, independent contractors
and consultants of the Company or any parent or subsidiary corporation of the
Company. Only nonqualified stock options may be issued under the 1996 Plan.
Stock options may not be granted to officers and directors of the Company. 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.
An aggregate of 19,136,000 shares has been reserved for the grant of stock
options under the 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 Plan shall not exceed eight years from the date of grant.
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
31
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 SEC, 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
insuring that the Company adopts and maintains responsible and responsive
compensation programs for its employees, officers and directors consistent with
the long-range interests of stockholders. In furtherance of this task, the
Compensation Committee has the obligation to ensure that (a) the Company's
compensation policies (including its wage and salary levels, equity programs,
and health and benefit plans) are competitive and designed to attract and
retain the most qualified employees, officers and directors, (b) all components
of compensation (including wage and salary levels, equity programs, and health
and benefit plans) are aligned to actual performance and results, and (c) the
Company properly and fully performs all of its public disclosure obligations
with respect to its compensation programs and director and executive officer
compensation. The Compensation Committee is also responsible for 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 equity incentive plans. The Compensation Committee Chairman
reports on Compensation Committee's actions and recommendations at Board
meetings. The Company's Compensation and Benefits Group within the company's
Human Resources department supports the work of the Compensation Committee and
in some cases acts pursuant to delegated authority to fulfill various functions
in administering the Company's compensation programs. In addition, the
Compensation Committee has the authority to engage the services of outside
advisors, experts and others to provide assistance as needed. The Compensation
Committee is composed solely of non-employee directors, as such term is defined
in Rule 16b-3 under the Securities and Exchange Act of 1934, as amended, each
of whom must at all times meet all other applicable federal securities and
NASDAQ listing requirements to qualify as an independent director.
The fundamental policy of the Compensation Committee is to provide the
Company's chief executive officer and other executive officers with competitive
compensation opportunities based upon their contribution to the
32
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 package
for the chief executive officer and other executive officers 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 2003 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 executive 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 2003, 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 2003.
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
33
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 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 2003 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 2003 was
approximately $544,440 ($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 2003 Dr. Straus was awarded options to purchase 750,000 shares of Common
Stock at a purchase price of $3.31 per share. Dr. Straus did not receive a
bonus during fiscal 2003.
The Compensation Committee recommended, and the Board of Directors
approved, Dr. Kennedy's base salary and initial stock option grant in part by
comparing the base salaries of chief executive officers at other companies. Dr.
Kennedy's base salary was set at the approximate median of the base salary
range for chief executive officers of comparative companies chosen based upon
geographic location, annual revenue and profitability, market capitalization
and those which may compete with the Company in recruiting executive talent.
The Company is required to disclose its policy regarding qualifying
executive compensation for deductibility under Section 162(m) of the Internal
Revenue Code of 1986, as amended (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. The cash compensation paid to the Company's executive officers for
fiscal 2003 did not 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 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. The Company's proposed 2003 Plan is structured so that
any compensation deemed paid to an executive officer when he or she exercises
an outstanding option or stock appreciation right under the 2003 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. In addition, other stock based awards issued
under the 2003 Plan may be exempt from the $1 million limitation if such awards
are subject to performance criteria and administered in accordance with Section
162(m) of the Code. The Company has discretion to issue other stock based
awards which are intended to be exempt from the $1 million limitation as well
as other stock based awards that are not intended to be exempt from the $1
million limitation. Should the 2003 Plan be approved by stockholders, it is the
intent of the Board to require that at least 2/3rds of all awards to Covered
Employees contain criteria under which the vesting of such awards is tied to
achievement of specified performance milestones.
COMPENSATION COMMITTEE
Peter A. Guglielmi
Martin A. Kaplan
Kevin J. Kennedy, Ph.D.(1)
Casimir S. Skrzypczak
- -------------
(1) Dr. Kennedy resigned from the Compensation Committee upon commencing
employment with the Company as Chief Executive Officer on September 1,
2003.
34
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 Audit Committee of the Board of Directors is responsible for assisting
the full Board of Directors in fulfilling its oversight responsibilities
relative to the Company's financial statements, financial reporting practices,
systems of internal accounting and financial controls, the internal audit
function, annual independent audits of the Company's financial statements, and
such legal and ethics programs as may established from time to time by the
Board. The Audit Committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and personnel
of the Company and may retain external consultants at its sole discretion. The
Audit Committee is composed solely of non-employee directors, as such term is
defined in Rule 16b-3 under the Securities and Exchange Act of 1934, as
amended, all of whom shall satisfy the independence, financial literacy and
experience requirements of Section 10A of the Securities Exchange Act of 1934,
as amended, the Sarbanes-Oxley Act of 2002, rules applicable to NASDAQ-listed
issuers, and any other regulatory requirements. All members of the Committee
are required to have a working knowledge of basic finance and accounting, and
at all times at least one member of the Committee qualifies as a "financial
expert" as defined by the Sarbanes-Oxley Act of 2002.
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, 2003,
which includes the consolidated balance sheets of the Company as of June 30,
2003 and 2002, 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, 2003, 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, 2003.
AUDIT COMMITTEE
Bruce D. Day
Peter A. Guglielmi
Richard T. Liebhaber
Casimir S. Skrzypczak
35
STOCK PERFORMANCE GRAPH
The following graph and table set forth the Company's total cumulative
stockholder return of an investment of $100 on June 1998 and ending June 30,
2003 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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG JDS UNIPHASE CORPORATION, THE S & P 500 INDEX,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
[the following information was represented as a line chart in the printed
material]
June 30,
--------------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- ---------- -------- ------ -------
JDS Uniphase Corporation ................ $ 216 $ 570 $ 3,293 $ 343 $ 73 $ 45
S&P 500 Index ........................... 130 160 171 146 120 92
Nasdaq Stock Market (U.S.) .............. 132 189 280 152 103 87
Nasdaq Telecommunications Index ......... 169 277 311 132 45 41
* $100 invested on 6/30/98 in stock or index-including reinvestment of
dividends. Fiscal year ending June 30.
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 2003, all
36
Reporting Persons complied with the applicable filing requirements on a timely
basis, except for a Form 4 filing on behalf of Jo Major reporting an open
market sale which was inadvertently filed late.
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
2004 Annual Meeting of Stockholders (the "2004 Annual Meeting"), a
stockholder's notice must be received by the Company at its principal executive
offices not less than 30 days nor more than 60 days prior to the 2004 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 2004 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 2004 Annual Meeting: (i) a brief
description of the business desired to be brought before the 2004 Annual
Meeting and the reasons for conducting such business at the 2004 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 2004 Annual Meeting must be received by the Company not later
than June 4, 2004 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 FISCAL 2003 REPORT,
INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED
THEREWITH.
By Order of the Board of Directors,
/s/ Kevin J. Kennedy
Kevin J. Kennedy, Ph.D.
Chief Executive Officer
October 2, 2003
San Jose, California
37
APPENDIX A
AUDIT COMMITTEE CHARTER
A-1
Audit Committee Charter
Organization
There shall be a Committee of the Board of Directors to be known as the
Audit Committee. The Audit Committee shall be comprised of three or more
Directors, as appointed by the Board of Directors. The Board shall designate
the Audit Committee's chairperson, and all members shall serve at the
discretion of the Board.
Each member of the Audit Committee shall satisfy the independence,
financial literacy and experience requirements of Section 10A of the Securities
Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, rules applicable to
NASDAQ-listed issuers, and any other regulatory requirements. All members of
the Committee shall have a working knowledge of basic finance and accounting,
and at least one member of the Committee shall be a "financial expert" as
defined by the Sarbanes-Oxley Act of 2002.
The Committee may delegate its authority to the chairperson or other
member, when appropriate.
Statement of Policy
The Audit Committee shall provide assistance to the Directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements, the financial reporting practices of the Company, the
systems of internal accounting and financial controls, the internal audit
function, the annual independent audit of the Company's financial statements,
and the legal compliance and ethics programs as established by management and
the Board.
In so doing, it is the responsibility of the Audit Committee to maintain
free and open communication between the Committee, the independent auditors,
the internal auditors, and the management of the Company. In discharging its
oversight role, the Committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and personnel
of the Company and the power to retain outside counsel, accounting or other
advisors for this purpose. In addition, the Company shall provide appropriate
funding, as determined by the Audit Committee, for compensation to the
independent auditor and to any advisors that the Audit Committee chooses to
engage.
Responsibilities
The primary responsibility of the Audit Committee is to assist the Board
of Directors in fulfilling its oversight responsibilities with respect to:
o The integrity of the Company's financial statements and other
financial information provided by the Company to its stockholders, the
public and others.
o The Company's systems of disclosure controls and internal controls
regarding finance, accounting, legal compliance and ethical behavior.
o The Company's auditing, accounting and financial reporting processes
generally.
o The appointment, qualifications and performance of the Company's
internal audit function and independent auditors.
o Pre-approval of services (both audit and non-audit) to be provided by
the independent auditors.
o Review and approval of all related party transactions.
While the Audit Committee has the responsibilities and powers set forth in
this Charter, its role is oversight. Accordingly, it is not the duty of the
Audit Committee to plan or conduct audits or to determine that the Company's
financial statements and disclosures are complete and accurate and are in
accordance with generally accepted accounting principles and applicable rules
and regulations. These are the responsibilities of Company management and the
independent auditors.
A-2
In carrying out its responsibilities, the Audit Committee believes its
policies and procedures should remain flexible, in order to best react to
changing conditions and circumstances. The Committee should take appropriate
actions to set the overall corporate standards for quality financial reporting,
sound business risk practices and ethical behavior. Consistent with these
functions, the Audit Committee will encourage continuous improvement of, and
foster adherence to, the Company's policies, procedures and practices at all
levels. The following shall be the principal recurring processes of the Audit
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the Committee may amend them as
appropriate.
With respect to the independent auditors, the Committee shall:
o Be directly responsible for the appointment, compensation and
oversight of the work of the independent auditors (including
resolution of disagreements between Management and the independent
auditors regarding financial reporting) for the purpose of preparing
its audit report or related work.
o Review in advance and have the sole authority to pre-approve all audit
and non-audit services (as permitted by Section 10A of the Securities
Exchange Act of 1934) to be provided by the independent auditors. In
connection herewith, the Committee shall approve all fees and other
terms of engagement, and review and approve disclosures required to be
included in SEC periodic reports with respect to non-audit services.
o Review the experience, qualifications and overall performance of the
Company's independent audit team annually, and ensure that all partner
rotation requirements, as promulgated by applicable rules and
regulations, have been met.
o On an annual basis, review and discuss with the independent auditors
all relationships the independent auditors have with the Company in
order to evaluate the independent auditors' continued independence.
The Committee shall:
o ensure that the independent auditors submit to the Committee on
an annual basis a written statement delineating all relationships
and services that may impact the objectivity and independence of
the independent auditors;
o discuss with the independent auditors any disclosed relationship
or services that may impact the objectivity and independence of
the independent auditors; and
o satisfy itself as to the independent auditors' independence.
o At least annually, obtain and review a report from the independent
auditors describing:
o the independent auditors' internal quality control procedures and
review;
o any material issues raised by the most recent peer review of the
independent auditors; and
o any steps taken to deal with any such issues.
o Review all reports required to be submitted by the independent
auditors to the Committee under Section 10A of the Securities Exchange
Act of 1934.
o Review, based upon the recommendation of the independent auditors and
internal audit, the scope and plan of the work to be done by the
independent auditors for each fiscal year.
With respect to periodic and annual reports, the Committee shall:
o Review the draft Press Release regarding the quarterly and/or annual
financial results (including supporting internal Company financial
information and associated schedules), with the independent auditors
and management of the Company, prior to its release to the public.
Also, the Committee shall discuss the results of the quarterly review
and any other matters required to be communicated to the Committee by
the independent auditors under generally accepted auditing standards
("GAAS").
A-3
o Review the financial statements to be included in the Company's
Quarterly Reports on Form 10-Q (including associated CEO and CFO
certifications) with the independent auditors and management of the
Company.
o Review the annual audited financial statements to be included in the
Company's Annual Reports on Form 10-K (including associated CEO and
CFO certifications) with the independent auditors and management of
the Company, prior to its submission to Directors for review and
signature, including their judgment about the quality, not just the
acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the
financial statements. The Committee shall also discuss the results of
the annual audit and any other matters required to be communicated to
the Committee by the independent auditors under GAAS.
o Report the results of the annual audit to the Board of Directors. If
requested by the Board, invite the independent auditors to attend the
full Board of Directors meeting to assist in reporting the results of
the annual audit or to answer other Directors' questions
(alternatively, the other Directors, particularly the other
independent Directors, may be invited to attend the Audit Committee
meeting during which the results of the annual audit are reviewed).
o Upon completion of their review, recommend to the Board of Directors
that the Company's annual audited financial statements be included in
the Company's annual report on Form 10-K for filing with the SEC.
o Prepare the Audit Committee report required by the SEC to be included
in the Company's annual proxy statement and any other Committee
reports required by applicable securities laws or stock exchange
listing requirements or rules.
o Review the financial statements (audited or otherwise) to be included
in other SEC filings (e.g., Form S3), as required.
o Review reports received from regulators and other legal and regulatory
matters that may have a material effect on the financial statements or
related company compliance policies.
With respect to the internal audit function, the Company's disclosure controls
and internal controls, the Committee shall:
o Review and concur with management's appointment, termination or
replacement of the director of internal audit.
o Discuss with internal audit, the independent auditors, and financial
and accounting personnel, the adequacy and effectiveness of the
disclosure controls and internal controls of the Company, and elicit
any recommendations for the improvement of such controls or particular
areas where new or more detailed controls or procedures are desirable.
Particular emphasis should be given to the adequacy of internal
controls to prevent or detect any payments, transactions, or
procedures that might be deemed illegal or otherwise improper.
o Review the internal audit function of the Company including its
independence from management, reporting obligations to the Audit
Committee, the proposed audit plans for the coming year, and the
coordination of such plans with the independent auditors.
o Inquire of management, internal audit, and the independent auditors
about significant risks or exposures and assess the steps management
has taken to minimize such risks to the Company.
o Receive from time-to-time a summary of findings from completed
internal audits, and a progress report on the proposed internal audit
plan, with explanations for any deviations from the original plan.
o Meet separately with internal audit, the independent auditors and with
financial and operational personnel, as appropriate, on a periodic
basis. Among the items to be discussed in these meetings are
A-4
the results of their examinations, the evaluation of the Company's
financial, accounting, and auditing personnel, and the cooperation
that the internal auditors and independent auditors received during
the course of audits.
In addition, the Committee shall:
o Establish procedures for and ensure the Company instigates policies,
in accordance with the Whistleblower provisions of the Sarbanes-Oxley
Act of 2002, that support:
o the receipt, retention and appropriate treatment of complaints
received by the Company regarding accounting, internal accounting
controls or auditing matters; and
o the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or auditing
matters.
o Review accounting and financial human resources and succession
planning within the Company.
o Review and approve any related party transactions.
o Submit the minutes of all meetings of the Audit Committee to, or
discuss the matters discussed at each Committee meeting with, the
Board of Directors, as appropriate.
o Establish the policy for the Company's hiring of employees or former
employees of the independent auditors who were engaged on the
Company's account.
o Review and reassess the adequacy of this Charter as appropriate and
recommend to the Board any changes the Committee deems appropriate.
o Investigate any matter brought to its attention within the scope of
its duties, with the power to retain outside counsel for this purpose
if, in its judgment, that is appropriate.
o Perform any other activities consistent with this Charter, the
Company's By-laws and governing law as the Committee or the Board
deems necessary or appropriate.
A-5
APPENDIX B
2003 EQUITY INCENTIVE PLAN
B-1
JDS UNIPHASE CORPORATION
2003 EQUITY INCENTIVE PLAN
1. Purpose of the Plan. The purpose of this Plan is to provide incentives
to attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company by offering them an
opportunity to participate in the Company's future performance.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees appointed
to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the Plan
and the Awards under applicable provisions of federal securities laws, state
corporate and securities laws, the Code, the rules of any applicable stock
exchange or national market system, and the rules of any non-U.S. jurisdiction
applicable to Awards granted to residents therein.
(d) "Assumed" means that pursuant to a Corporate Transaction either (i)
the Award is expressly affirmed by the Company or (ii) the contractual
obligations represented by the Award are expressly assumed (and not simply by
operation of law) by the successor entity or its Parent in connection with the
Corporate Transaction with appropriate adjustments to the number and type of
securities of the successor entity or its Parent subject to the Award and the
exercise or purchase price thereof which preserves the compensation element of
the Award existing at the time of the Corporate Transaction as determined in
accordance with the instruments evidencing the agreement to assume the Award.
(e) "Award" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(f) "Award Agreement" means the written agreement evidencing the grant
of an Award executed by the Company and the Grantee, including any amendments
thereto.
(g) "Board" means the Board of Directors of the Company.
(h) "Cause" means, with respect to the termination by the Company or a
Related Entity of the Grantee's Continuous Active Service, that such
termination is for "Cause" as such term is expressly defined in a
then-effective written agreement between the Grantee and the Company or such
Related Entity, or in the absence of such then-effective written agreement and
definition, is based on, in the determination of the Administrator, the
Grantee's: (i) performance of any act or failure to perform any act in bad
faith and to the detriment of the Company or a Related Entity; (ii) dishonesty,
intentional misconduct, material violation of any applicable Company or Related
Entity policy, or material breach of any agreement with the Company or a
Related Entity; or (iii) commission of a crime involving dishonesty, breach of
trust, or physical or emotional harm to any person.
(i) "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related group
of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of
the offeror do not recommend such stockholders accept, or
B-2
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals who
are Continuing Directors.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
(k) "Committee" means any committee composed of members of the Board
appointed by the Board to administer the Plan.
(l) "Common Stock" means the common stock of the Company.
(m) "Company" means JDS Uniphase Corporation, a Delaware corporation.
(n) "Consultant" means any person (other than an Employee or a Director,
solely with respect to rendering services in such person's capacity as a
Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.
(o) "Continuing Directors" means members of the Board who either (i)
have been Board members continuously for a period of at least thirty-six (36)
months or (ii) have been Board members for less than thirty-six (36) months and
were elected or nominated for election as Board members by at least a majority
of the Board members described in clause (i) who were still in office at the
time such election or nomination was approved by the Board.
(p) "Continuous Active Service" means that the provision of services to
the Company or a Related Entity in any capacity of Employee, Director or
Consultant is not interrupted or terminated. In jurisdictions requiring notice
in advance of an effective termination as an Employee, Director or Consultant,
Continuous Active Service shall be deemed terminated upon the actual cessation
of providing services to the Company or a Related Entity notwithstanding any
required notice period that must be fulfilled before a termination as an
Employee, Director or Consultant can be effective under Applicable Laws.
Continuous Active Service shall not be considered interrupted in the case of
(i) any approved leave of absence, (ii) transfers among the Company, any
Related Entity, or any successor, in any capacity of Employee, Director or
Consultant, or (iii) any change in status as long as the individual remains in
the service of the Company or a Related Entity in any capacity of Employee,
Director or Consultant (except as otherwise provided in the Award Agreement).
An approved leave of absence shall include sick leave, military leave, or any
other authorized personal leave. For purposes of each Incentive Stock Option
granted under the Plan, if such leave exceeds ninety (90) days, and
reemployment upon expiration of such leave is not guaranteed by statute or
contract, then the Incentive Stock Option shall be treated as a Non-Qualified
Stock Option on the day three (3) months and one (1) day following the
expiration of such ninety (90) day period.
(q) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company;
(iii) the complete liquidation or dissolution of the Company;
(iv) any reverse merger or series of related transactions culminating
in a reverse merger (including, but not limited to, a tender offer followed by
a reverse merger) in which the Company is the surviving entity but in which
securities possessing more than forty percent (40%) of the total combined
voting power of the Company's outstanding securities are transferred to a
person or persons different from those who held such securities immediately
prior to such merger or the initial transaction culminating in such merger but
excluding any such transaction or series of related transactions that the
Administrator determines shall not be a Corporate Transaction; or
B-3
(v) acquisition in a single or series of related transactions by any
person or related group of persons (other than the Company or by a
Company-sponsored employee benefit plan) of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities but excluding any such transaction or series of related
transactions that the Administrator determines shall not be a Corporate
Transaction.
(r) "Covered Employee" means an Employee who is a "covered employee"
under Section 162(m)(3) of the Code.
(s) "Director" means a member of the Board or the board of directors of
any Related Entity.
(t) "Disability" means as defined under the long-term disability policy
of the Company or the Related Entity to which the Grantee provides services
regardless of whether the Grantee is covered by such policy. If the Company or
the Related Entity to which the Grantee provides service does not have a
long-term disability plan in place, "Disability" means that a Grantee is unable
to carry out the responsibilities and functions of the position held by the
Grantee by reason of any medically determinable physical or mental impairment
for a period of not less than ninety (90) consecutive days. A Grantee will not
be considered to have incurred a Disability unless he or she furnishes proof of
such impairment sufficient to satisfy the Administrator in its discretion.
(u) "Dividend Equivalent Right" means a right entitling the Grantee to
compensation measured by dividends paid with respect to Common Stock.
(v) "Employee" means any person, including an Officer or Director, who
is in the employ of the Company or any Related Entity, subject to the control
and direction of the Company or any Related Entity as to both the work to be
performed and the manner and method of performance. The payment of a director's
fee by the Company or a Related Entity shall not be sufficient to constitute
"employment" by the Company.
(w) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(x) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation The Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system on the
date of determination (or, if no closing sales price or closing bid was
reported on that date, as applicable, on the last trading date such closing
sales price or closing bid was reported), as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted on an automated
quotation system (including the OTC Bulletin Board) or by a recognized
securities dealer, but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of determination (or, if no such prices
were reported on that date, on the last date such prices were reported), as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the Common Stock of
the type described in (i) and (ii), above, the Fair Market Value thereof shall
be determined by the Administrator in good faith.
(y) "Grantee" means an Employee, Director or Consultant who receives an
Award under the Plan.
(z) "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, any person sharing the
Grantee's household (other than a tenant or employee), a trust in which these
persons (or the Grantee) have more than fifty percent
B-4
(50%) of the beneficial interest, a foundation in which these persons (or the
Grantee) control the management of assets, and any other entity in which these
persons (or the Grantee) own more than fifty percent (50%) of the voting
interests.
(aa) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code
(bb) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(cc) "Officer" means a person who is an officer of the Company or a
Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(dd) "Option" means an option to purchase Shares pursuant to an Award
Agreement granted under the Plan.
(ee) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(ff) "Performance-Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
(gg) "Performance Shares" means Shares or an Award denominated in Shares
which may be earned in whole or in part upon attainment of performance criteria
established by the Administrator.
(hh) "Performance Units" means an Award which may be earned in whole or
in part based upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or
a combination of cash, Shares or other securities as established by the
Administrator.
(ii) "Plan" means this 2003 Equity Incentive Plan.
(jj) "Related Entity" means any Parent or Subsidiary of the Company and
any business, corporation, partnership, limited liability company or other
entity in which the Company or a Parent or a Subsidiary of the Company holds a
substantial ownership interest, directly or indirectly.
(kk) "Replaced" means that pursuant to a Corporate Transaction the Award
is replaced with a comparable stock award or a cash incentive program of the
Company, the successor entity (if applicable) or Parent of either of them which
preserves the compensation element of such Award existing at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same (or a more favorable) vesting schedule applicable to such Award. The
determination of Award comparability shall be made by the Administrator and its
determination shall be final, binding and conclusive.
(ll)"Restricted Stock" means Shares issued under the Plan to the Grantee
for such consideration, if any, and subject to such restrictions on transfer,
rights of first refusal, repurchase provisions, forfeiture provisions, and
other terms and conditions as established by the Administrator.
(mm) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor thereto.
(nn) "SAR" means a stock appreciation right entitling the Grantee to
Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(oo) "Share" means a share of the Common Stock.
(pp) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
B-5
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10 below, the maximum aggregate
number of Shares which may be issued pursuant to all Awards (including
Incentive Stock Options) is 140,000,000 Shares. Notwithstanding the foregoing,
no more than twenty percent (20%) of the aggregate number of Shares reserved
for issuance under the Plan pursuant to the preceding sentence may be issued
pursuant to all Awards of Restricted Stock. The Shares to be issued pursuant to
Awards may be authorized, but unissued, or reacquired Common Stock.
(b) The maximum number of Shares with respect to which Awards may be
issued to Covered Employees as a group in any fiscal year of the Company shall
be limited to five percent (5%) of the total number of Shares subject to Awards
issued during such fiscal year. Notwithstanding the preceding sentence, Awards
to Covered Employees made in connection with such Covered Employees'
commencement of employment with the Company or promotion (either to a position
which would result in an employee becoming a Covered Employee, or the promotion
of a Covered Employee from one position to another) shall not be included for
purposes of calculating whether such limitation has been reached.
(c) Any Shares covered by an Award (or portion of an Award) which is
forfeited, canceled or expires (whether voluntarily or involuntarily) shall be
deemed not to have been issued for purposes of determining the maximum
aggregate number of Shares which may be issued under the Plan. Shares that
actually have been issued under the Plan pursuant to an Award shall not be
returned to the Plan and shall not become available for future issuance under
the Plan, except that if unvested Shares are forfeited, or repurchased by the
Company at the lower of their original purchase price or their Fair Market
Value at the time of repurchase, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and Officers. With
respect to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted
in such a manner as to satisfy the Applicable Laws and to permit such grants
and related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board.
(ii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered
by (A) the Board or (B) a Committee designated by the Board, which Committee
shall be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(iii) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
(iv) Administration Errors. In the event an Award is granted in a
manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted by
the Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
B-6
(i) to select the Employees, Directors and Consultants to whom Awards
may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under the
Plan, provided that (A) any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent, (B) the reduction of the exercise price of any Option awarded
under the Plan shall be subject to stockholder approval and (C) canceling an
Option at a time when its exercise price exceeds the Fair Market Value of the
underlying Shares, in exchange for another Option, Restricted Stock, or other
Award shall be subject to stockholder approval, unless the cancellation and
exchange occurs in connection with a Corporate Transaction;
(vii) to construe and interpret the terms of the Plan and Awards,
including without limitation, any notice of award or Award Agreement, granted
pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or procedures
to accommodate the rules or laws of applicable non-U.S. jurisdictions and to
afford Grantees favorable treatment under such rules or laws; provided,
however, that no Award shall be granted under any such additional terms,
conditions, rules or procedures with terms or conditions which are inconsistent
with the provisions of the Plan; and
(ix) to take such other action, not inconsistent with the terms of
the Plan, as the Administrator deems appropriate.
(c) Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or as Officers or Employees of the
Company or a Related Entity, members of the Board and any Officers or Employees
of the Company or a Related Entity to whom authority to act for the Board, the
Administrator or the Company is delegated shall be defended and indemnified by
the Company to the extent permitted by law on an after-tax basis against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any claim, investigation, action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act
under or in connection with the Plan, or any Award granted hereunder, and
against all amounts paid by them in settlement thereof (provided such
settlement is approved by the Company) or paid by them in satisfaction of a
judgment in any such claim, investigation, action, suit or proceeding, except
in relation to matters as to which it shall be adjudged in such claim,
investigation, action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct; provided, however, that within
thirty (30) days after the institution of such claim, investigation, action,
suit or proceeding, such person shall offer to the Company, in writing, the
opportunity at the Company's expense to handle and defend the same.
5. Eligibility. Awards other than Incentive Stock Options may be granted
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company or a Parent or a Subsidiary of the Company. An
Employee, Director or Consultant who has been granted an Award may, if
otherwise eligible, be granted additional Awards. Awards may be granted to such
Employees, Directors or Consultants who are residing in non-U.S. jurisdictions
as the Administrator may determine from time to time.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the Plan to
award any type of arrangement to an Employee, Director or Consultant that is
not inconsistent with the provisions of the Plan and that by its terms involves
or might involve the issuance of (i) Shares, (ii) cash or (iii) an Option, a
SAR, or similar right
B-7
with a fixed or variable price related to the Fair Market Value of the Shares
and with an exercise or conversion privilege related to the passage of time,
the occurrence of one or more events, or the satisfaction of performance
criteria or other conditions. Such awards include, without limitation, Options,
SARs, Restricted Stock, Dividend Equivalent Rights, Performance Units or
Performance Shares, and an Award may consist of one such security or benefit,
or two (2) or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the Award
Agreement. In the case of an Option, the Option shall be designated as either
an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary of the Company)
exceeds $100,000, such excess Options, to the extent of the Shares covered
thereby in excess of the foregoing limitation, shall be treated as
Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the grant date of the relevant
Option.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, the following: (i) increase in share price, (ii) earnings per
share, (iii) total stockholder return, (iv) operating margin, (v) gross margin,
(vi) return on equity, (vii) return on assets, (viii) return on investment,
(ix) operating income, (x) net operating income, (xi) pre-tax profit, (xii)
cash flow, (xiii) revenue, (xiv) expenses, (xv) earnings before interest, taxes
and depreciation, (xvi) economic value added, (xvii) market share, (xviii)
personal management objectives, and (xix) other measures of performance
selected by the Administrator. Partial achievement of the specified criteria
may result in a payment or vesting corresponding to the degree of achievement
as specified in the Award Agreement.
(d) Acquisitions and Other Transactions. The Administrator may issue
Awards under the Plan in settlement, assumption or substitution for,
outstanding awards or obligations to grant future awards in connection with the
Company or a Related Entity acquiring another entity, an interest in another
entity or an additional interest in a Related Entity whether by merger, stock
purchase, asset purchase or other form of transaction.
(e) Deferral of Award Payment. The Administrator may establish one or
more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or
other earnings, if any, on amounts, Shares or other consideration so deferred,
and such other terms, conditions, rules and procedures that the Administrator
deems advisable for the administration of any such deferral program.
(f) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(g) Individual Limitations on Awards. The maximum number of Shares with
respect to which Awards may be granted to any Grantee in any fiscal year of the
Company shall be three million (3,000,000) Shares. In connection with a
Grantee's (i) commencement of Continuous Active Service or (ii) first promotion
in any fiscal year of the Company, a Grantee may be granted Awards for up to an
additional (2,000,000) Shares which shall not count against the limit set forth
in the preceding sentence. The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
pursuant to Section
B-8
10, below. To the extent required by Section 162(m) of the Code or the
regulations thereunder, in applying the foregoing limitations with respect to a
Grantee, if any Awards are canceled, the canceled Awards shall continue to
count against the maximum number of Shares with respect to which Awards may be
granted to the Grantee. For this purpose, the repricing of an Option (or in the
case of a SAR, the base amount on which the stock appreciation is calculated is
reduced to reflect a reduction in the Fair Market Value of the Common Stock)
shall be treated as the cancellation of the existing Option or SAR and the
grant of a new Option or SAR. If the vesting or receipt of Shares under the
Award is deferred to a later date, any amount (whether denominated in Shares or
cash) paid in addition to the original number of Shares subject to the Award
will not be treated as an increase in the number of Shares subject to the Award
if the additional amount is based either on a reasonable rate of interest or on
one or more predetermined actual investments such that the amount payable by
the Company at the later date will be based on the actual rate of return of a
specific investment (including any decrease as well as any increase in the
value of an investment).
(h) Early Exercise. The Award Agreement may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be
subject to a repurchase right in favor of the Company or a Related Entity or to
any other restriction the Administrator determines to be appropriate.
(i) Term of Award. The term of each Award shall be the term stated in
the Award Agreement, provided, however, that the term of an Award shall be no
more than eight (8) years from the date of grant thereof. However, in the case
of an Incentive Stock Option granted to a Grantee who, at the time the Option
is granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary of the
Company, the term of the Incentive Stock Option shall be five (5) years from
the date of grant thereof or such shorter term as may be provided in the Award
Agreement.
(j) Transferability of Awards. Incentive Stock Options may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee. Other
Awards shall be transferable by will and by the laws of descent and
distribution, and during the lifetime of the Grantee, by gift or pursuant to a
domestic relations order to members of the Grantee's Immediate Family to the
extent and in the manner determined by the Administrator. Notwithstanding the
foregoing, the Grantee may designate a beneficiary of the Grantee's Award in
the event of the Grantee's death on a beneficiary designation form provided by
the Administrator.
(k) Time of Granting Awards. The date of grant of an Award shall for all
purposes be the date on which the Administrator makes the determination to
grant such Award, or such later date as is determined by the Administrator.
7. Award Exercise or Purchase Price, Consideration and Taxes.
(a) Exercise or Purchase Price. The exercise or purchase price, if any,
for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(1) granted to an Employee who, at the time of the grant of such
Incentive Stock Option owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company, the per Share exercise price shall be not less than
one hundred ten percent (110%) of the Fair Market Value per Share on the date
of grant; or
(2) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be not less than
one hundred percent (100%) of the Fair Market Value per Share on the date of
grant.
B-9
(ii) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than one hundred percent (100%) of the Fair
Market Value per Share on the date of grant.
(iii) In the case of a SAR, the base amount on which the stock
appreciation is calculated shall be not less than one hundred percent (100%) of
the Fair Market Value per Share on the date of grant.
(iv) In the case of Awards intended to qualify as Performance-Based
Compensation, the exercise or purchase price, if any, shall be not less than
one hundred percent (100%) of the Fair Market Value per Share on the date of
grant.
(v) In the case of other Awards, such price as is determined by the
Administrator.
(vi) Notwithstanding the foregoing provisions of this Section 7(a), in
the case of an Award issued pursuant to Section 6(d) above, the exercise or
purchase price for the Award shall be determined in accordance with the
provisions of the relevant instrument evidencing the agreement to issue such
Award.
(b) Consideration. Subject to Applicable Laws, the consideration to be
paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator (and,
in the case of an Incentive Stock Option, shall be determined at the time of
grant). In addition to any other types of consideration the Administrator may
determine, the Administrator is authorized to accept as consideration for
Shares issued under the Plan the following, provided that the portion of the
consideration equal to the par value of the Shares must be paid in cash or
other legal consideration permitted by the Delaware General Corporation Law:
(i) cash;
(ii) check;
(iii) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Award) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate exercise price of the Shares as to which said Award shall be
exercised, provided, however, that Shares acquired under the Plan or any other
equity compensation plan or agreement of the Company must have been held by the
Grantee for a period of more than six (6) months;
(iv) with respect to Options, payment through a broker-dealer sale
and remittance procedure pursuant to which the Grantee (A) shall provide
written instructions to a Company designated brokerage firm to effect the
immediate sale of some or all of the purchased Shares and remit to the Company
sufficient funds to cover the aggregate exercise price payable for the
purchased Shares and (B) shall provide written directives to the Company to
deliver the certificates for the purchased Shares directly to such brokerage
firm in order to complete the sale transaction; or
(v) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee or
other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any non-U.S., federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such times
and under such conditions as determined by the Administrator under the terms of
the Plan and specified in the Award Agreement.
B-10
(ii) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Award by the person entitled to exercise the Award and full payment for the
Shares with respect to which the Award is exercised, including, to the extent
selected, use of the broker-dealer sale and remittance procedure to pay the
purchase price as provided in Section 7(b)(iv).
(b) Exercise of Award Following Termination of Continuous Active
Service.
(i) An Award may not be exercised after the termination date of such
Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Active Service only to the extent
provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an Award
following the termination of the Grantee's Continuous Active Service for a
specified period, the Award shall terminate to the extent not exercised on the
last day of the specified period or the last day of the original term of the
Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the extent
not exercised within the time permitted by law for the exercise of Incentive
Stock Options following the termination of a Grantee's Continuous Active
Service shall convert automatically to a Non-Qualified Stock Option and
thereafter shall be exercisable as such to the extent exercisable by its terms
for the period specified in the Award Agreement.
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or
which have been returned to the Plan, the exercise or purchase price of each
such outstanding Award, the maximum number of Shares with respect to which
Awards may be granted to any Grantee in any fiscal year of the Company, as well
as any other terms that the Administrator determines require adjustment shall
be proportionately adjusted for (i) any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Shares, or similar transaction
affecting the Shares, (ii) any other increase or decrease in the number of
issued Shares effected without receipt of consideration by the Company, or
(iii) as the Administrator may determine in its discretion, any other
transaction with respect to Common Stock including a corporate merger,
consolidation, acquisition of property or stock, separation (including a
spin-off or other distribution of stock or property), reorganization,
liquidation (whether partial or complete) or any similar transaction; provided,
however that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator and the Administrator's
determination shall be final, binding and conclusive. Except as the
Administrator determines, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
number or price of Shares subject to an Award.
B-11
11. Corporate Transactions.
(a) Termination of Award to Extent Not Assumed in Corporate
Transaction. Effective upon the consummation of a Corporate Transaction, all
outstanding Awards under the Plan shall terminate. However, all such Awards
shall not terminate to the extent they are Assumed in connection with the
Corporate Transaction.
(b) Acceleration of Award Upon Corporate Transaction. Except as provided
otherwise in an individual Award Agreement, in the event of a Corporate
Transaction, for the portion of each Award that is neither Assumed nor
Replaced, such portion of the Award shall automatically become fully vested and
exercisable and be released from any repurchase or forfeiture rights (other
than repurchase rights exercisable at fair market value) for all of the Shares
at the time represented by such portion of the Award, immediately prior to the
specified effective date of such Corporate Transaction.
(c) Effect of Acceleration on Incentive Stock Options. Any Incentive
Stock Option accelerated under this Section 11 in connection with a Corporate
Transaction shall remain exercisable as an Incentive Stock Option under the
Code only to the extent the $100,000 dollar limitation of Section 422(d) of the
Code is not exceeded. To the extent such dollar limitation is exceeded, the
excess Options shall be treated as Non-Qualified Stock Options.
12. Effective Date and Term of Plan. The Plan shall become effective upon its
approval by the stockholders of the Company. It shall continue in effect for a
term of ten (10) years unless sooner terminated. Subject to Applicable Laws,
Awards may be granted under the Plan upon its becoming effective.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the Plan;
provided, however, that no such amendment shall be made without the approval of
the Company's stockholders to the extent such approval is required by
Applicable Laws, or if such amendment would change any of the provisions of
Section 4(b)(vi) or this Section 13(a).
(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) No suspension or termination of the Plan (including termination of
the Plan under Section 12, above) shall adversely affect any rights under
Awards already granted to a Grantee.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
(b) The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
15. No Effect on Terms of Employment/Consulting Relationship. The Plan
shall not confer upon any Grantee any right with respect to the Grantee's
Continuous Active Service, nor shall it interfere in any way with his or her
right or the right of the Company or any Related Entity to terminate the
Grantee's Continuous Active Service at any time, with or without Cause, and
with or without notice. The ability of the Company or any Related Entity to
terminate the employment of a Grantee who is employed at will is in no way
affected by its determination that the Grantee's Continuous Active Service has
been terminated for Cause for the purposes of this Plan.
16. No Effect on Retirement and Other Benefit Plans. Except as
specifically provided in a retirement or other benefit plan of the Company or a
Related Entity, Awards shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of the Company or
a Related Entity, and shall not affect any benefits under any other benefit
plan of any kind or any benefit plan subsequently instituted under
B-12
which the availability or amount of benefits is related to level of
compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the
Employee Retirement Income Security Act of 1974, as amended.
17. Unfunded Obligation. Grantees shall have the status of general
unsecured creditors of the Company. Any amounts payable to Grantees pursuant to
the Plan shall be unfunded and unsecured obligations for all purposes,
including, without limitation, Title I of the Employee Retirement Income
Security Act of 1974, as amended. Neither the Company nor any Related Entity
shall be required to segregate any monies from its general funds, or to create
any trusts, or establish any special accounts with respect to such obligations.
The Company shall retain at all times beneficial ownership of any investments,
including trust investments, which the Company may make to fulfill its payment
obligations hereunder. Any investments or the creation or maintenance of any
trust or any Grantee account shall not create or constitute a trust or
fiduciary relationship between the Administrator, the Company or any Related
Entity and a Grantee, or otherwise create any vested or beneficial interest in
any Grantee or the Grantee's creditors in any assets of the Company or a
Related Entity. The Grantees shall have no claim against the Company or any
Related Entity for any changes in the value of any assets that may be invested
or reinvested by the Company with respect to the Plan.
B-13
APPENDIX C
2003 ANNUAL REPORT
C-1
================================================================================
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
For Annual and Transition Reports Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003*
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: 0-22874
---------------------
JDS UNIPHASE CORPORATION
(Exact name of Registrant as specified in its charter)
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 Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
As of August 15, 2003, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $4.3 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 and
directors 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 15, 2003, the Registrant had 1,434,259,133 shares of common
stock outstanding, including 66,093,931 exchangeable shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Annual Report on Form 10-K
is incorporated by reference to the Registrant's definitive Proxy Statement in
connection with the 2003 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the end of the fiscal year.
- ----------
* See Part II, Item 8 of this report for information regarding Registrant's
fiscal year.
- --------------------------------------------------------------------------------
================================================================================
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FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. A forward-looking
statement may contain words such as "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, among others, all italicized portions of this Report and the
entire "Strategy" section under Item 1. Business.
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. Forward-looking statements are made only as of the date of this
Report and subsequent facts or circumstances may contradict, obviate, undermine
or otherwise fail to support or substantiate such statements. We are under no
duty to update any of the forward-looking statements after the date of this
Annual Report on Form 10-K to conform such statements to actual results or to
changes in our expectations.
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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 through original equipment
manufacturers for display, security, medical/environmental instrumentation,
decorative, aerospace and defense applications.
Fiberoptic communications systems enable transmission of 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, routing (switching) and
receiving 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 fiberoptic communications, we apply our optical technologies
for use in the display, security, medical/environmental, instrumentation, and
aerospace and defense markets. Products of these businesses rely on 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. Specific product
applications include computer monitors and flat panel displays, projection
systems, photocopiers, facsimile machines, scanners, security products and
decorative surface treatments. We also supply laser products for biotechnology,
graphic arts and imaging, semiconductor processing, materials processing, and a
variety of other laser-based applications.
As further discussed in "Operating Segments and Products," we group our
communications and non-communications products into two principal segments which
we call the Communications Products Group and the Thin Film Products Group.
Our Internet address is www.jdsu.com. On our Investor Relations web site,
which is accessible through www.jdsu.com, we post all Securities and Exchange
Commission filings as soon as reasonably practicable after they are
electronically filed or furnished to the Securities and Exchange Commission. All
such filings on our Investor Relations web site are available free of charge.
The SEC maintains an Internet site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC.
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 rapidly increasing demand for larger,
faster and more robust networks (commonly collectively referred to as
"bandwidth");
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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 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 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.
Beginning in early 2001, the telecommunications industry began experiencing
a dramatic downturn, the primary direct cause of which was and continues to be a
precipitous decrease in network deployment and capital spending by the
telecommunications carriers. This decrease is attributable to, among other
things:
o network overcapacity in long haul and network core markets 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 contributed to a severe decline in overall demand for
new fiberoptic networks and the components and modules used therein. During most
of 2001 and continuing through today, our telecommunications systems
manufacturing customers have 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, 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, or to otherwise sustain their operations. Many of these
companies began major efforts to restructure their debt, reduce their costs and
establish sufficient revenues. Some of them have not succeeded and others may
not succeed in these efforts, in which event they will be liquidated or acquired
and consolidated. Also, during this time 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, for 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 limited access to capital for network
installation and expansion has severely harmed our business. While the declines
have slowed substantially and we have seen signs of stability in the market
recently, we do not anticipate any significant recovery in the near future.
Nevertheless, we believe the telecommunications industry will ultimately
improve from the current economic slowdown and grow in the future for several
reasons:
o Internet traffic, an important driver of network expansion, continues,
and we believe will continue, to grow at significant rates;
o Internet traffic is increasingly expected to include content such as
full motion video on demand (including high definition video)
multichannel high quality audio, online video conferencing, image
transfer, online gaming and other broadband applications, the delivery
of which will place greater demand on available bandwidth;
o North America and Europe have comprised the majority of optical
networking deployment, but we believe there could be significant
additional potential with the eventual development of other geographical
markets, including Latin America and Asia;
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o While fiberoptic networks currently have sufficient capacity for long
haul, city-to-city, and undersea applications, new markets, including
intra-city metro and access, and, ultimately, fiber-to-the-premises
(FTTP) remain largely untapped. We believe these markets represent a
significant future opportunity for our industry and for us. Moreover, we
anticipate that installation of fiberoptic systems into these markets
will increase demand for long-haul capacity as overall network traffic
expands;
o We believe the availability and popularity of WiFi (Wireless Fidelity
Technology -- 802.11b) access has the potential to increase Internet
traffic while making access to the Internet portable and secure; 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.
While we continue to experience weakness in our Communication Products
Group, during fiscal 2003 our Thin Film Products Group of businesses have made
significant contributions to our operating results.
We believe that the businesses reported under our Thin Film Products
segment will continue to be supported by consumer and industrial spending and
will grow in the future for several reasons:
o The display market, particularly rear-projection television sets and
plasma displays, are expected to increase:
o Security and authentication markets are expected to continue to grow to
address counterfeit concerns;
o There has been increased interest and demand internationally for
bio-hazard detection and other security applications and we believe that
these markets have potential to increase in both the public and private
sectors.
However, due to the current economic uncertainty, vertical product
consolidations occurring in these businesses and other factors, our net sales in
our display business declined during our fourth quarter and are expected to
decline during the near term. Our ability to predict our future revenue levels
in these markets is extremely limited in the near term and we are unable to
predict the timing or extent of any potential growth in such markets.
Global Realignment Program
In April 2001, we initiated our Global Realignment Program, under which we
continue to restructure our business in response to the current and anticipated
market environment and as part of our continuing efforts to integrate our
operations. The majority of the actions and announcements under the Global
Realignment Program are expected to be completed by the end of December 2003.
However, as our visibility is limited and we continue to respond to our
uncertain environment, there can be no assurance that such actions and
announcements will in fact be completed by such time, and, in fact, we may be
required to take additional actions, incur additional costs, and make additional
announcements under the program.
Specific actions to-date include the following:
o We have terminated 19,347 employees under the Global Realignment
Program. As of June 30, 2003, we had 5,489 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 Global
Less: (2,446) Realignment Program.
-------
April 2001: 26,231 Employment level at the inception of the Global Realignment Program.
Less: (19,347) Employees terminated under the Global Realignment Program.
Less: (1,395) Attrition not part of the Global Realignment Program.
-------
June 2003: 5,489 Employment at the end of fiscal 2003.
=======
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o We have eliminated many product development programs and are continuing
to consolidate or curtail others in order to focus our research and
development investments on the most promising projects in both the
Communications Products Group and the Thin Film Products Group.
o We are increasing our reliance on our contract manufacturing partners
primarily for our communications products and are continuing to
centralize in-house manufacturing processes to our low-cost Shenzhen
facility. It is important to note that the changes made to our
manufacturing strategy through, among other things, the Global
Realignment Program represent a fundamental shift in the way we make our
telecommunications products. Historically, we generally manufactured our
telecommunications products in-house, with considerable manual labor at
various locations within our global organization. Our products were
highly customized to particular customer specifications, which could
vary significantly from customer to customer, and which led to a very
large product catalog. More recently, we have:
o substantially rationalized our product catalog;
o encouraged product standardization across customers, as exemplified
by our network-ready products;
o increased our reliance on out-sourced manufacturing to assemble and
package our more commonly demanded products; and
o moved labor intensive, high volume manufacturing operations to our
Shenzhen facility.
We may not be successful in our manufacturing strategy. There are many
risks to be addressed, as more particularly described in the "Risk
Factors" section below. However, if we fail to adjust to the market
realities by, among other things, restructuring the manner in which we
make our products, we will not succeed in the telecommunications
industry in the future.
o We have consolidated manufacturing, research and development, sales and
administrative facilities through building and site closures. As of June
30, 2003, 29 sites and buildings 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 optimal locations. The 29
sites closed or scheduled for closure were as follows:
North America: Asheville, North Carolina; Columbus, Ohio;
Eatontown, New Jersey; Freehold, New Jersey; Gloucester,
Massachusetts; Horsham, Pennsylvania; Manteca, California;
Ottawa, Ontario (2 sites); Piscataway, New Jersey;
Raleigh, North Carolina; Richardson, Texas; Rochester, New
York; San Jose, California (2 sites); Toronto, Ontario;
Victoria, British Columbia.
Europe: Arnhem, Netherlands; Bracknell, United Kingdom; Eindhoven, Netherlands;
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.
o We have centralized many administrative functions such as information
technology, human resources and finance to take advantage of synergies,
economies of scale and common processes and controls.
Prior to the inception of the Global Realignment Program in April 2001, our
annual spending rate excluding inventory material costs was approximately $1.7
billion. We expect to reduce our annual expenses by approximately $1.3 billion
after the majority of the Global Realignment Program has been implemented,which
is expected by the end of December 2003. 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.
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
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during fiscal 2003, 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 on
Form 10-K for further discussion on these charges.
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 2003, we acquired the
following businesses/companies: the transceiver/transponder business unit from
OptronX, Inc.; L.A. Label Corporation; and the undersea pump laser business of
TriQuint Semiconductor, Inc. We cannot assure you that any of these acquisitions
will be successfully integrated into our operations or that we will receive any
benefits from the same.
Transceiver/Transponder Business Unit of OptronX, Inc.:
In September 2002 we acquired the transceiver/transponder business unit of
OptronX, Inc., which provides leading 200 and 300 pin, low-cost, small form
factor, optical transport modules. With the acquisition, we added short reach
and very short reach models to our 10 Gb/s transponder line, thereby broadening
an offering that already includes several reaches, rates and form factors.
Under the terms of this acquisition, we paid $6.2 million in cash and may
be required to make a contingent payment of up to $4.5 million in cash based on
the financial performance of OptronX in calendar year 2003.
L.A. Label:
In January 2003, we acquired L.A. Label Corporation in order to expand our
capabilities to provide integrated optical technology solutions for product
security and brand authentication. Flex Products Division, in our Thin Film
Product Group, manufacturers interference pigments that are used for counterfeit
protection and authentication applications. The addition of L.A. Label, which
has been supplying quality, custom, printed pressure sensitive labels and
packaging solutions for over 60 years, opens opportunities in new markets and
enables new products and services. Flex's SecureShift(TM) can now be integrated
into labels and packaging for applications such as software, CDs, videos,
apparel, pharmaceuticals, electronics, and numerous other consumer and luxury
items.
Under the terms of the acquisition, total consideration consisted of $19.4
million in cash of which we paid $17.4 million to the former owners of L.A.
Label. We have retained $2 million of the cash consideration for any future
liabilities we may incur resulting from any breach of general representations or
warranties made by the former shareholders of L.A. Label.
Submarine Pump Packaging:
In May 2003, we acquired from TriQuint Semiconductor, Inc. certain
intellectual property and manufacturing assets to be used in the packaging of
our pump lasers (primarily used in submarine applications) This acquisition was
consistent with our strategy to provide higher levels of integration, and helps
position us to be a leading supplier of submarine pump modules. Due to the cost
of installing and servicing submarine networks, all components and modules are
required to meet very strict performance and qualification criteria. We believe
as a result of this acquisition, our submarine pump modules will meet these very
strict performance and qualification criteria.
Under the terms of the acquisistion, we paid $6.6 million in cash to
acquire these assets.
Please refer to "Note 16. Mergers and Acquisitions" of Notes to
Consolidated Financial Statements under Item 8 of this Annual Report on Form
10-K for further discussion of these acquisitions.
Operating Segments and Products
We operate in two principal segments through which we develop and
manufacture our telecommunications and non-telecommunications products: (i)
Communication Products, which accounted for approximately 49% of
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our net sales in fiscal 2003, and (ii) Thin Film Products, which accounted for
approximately 51% of our net sales in fiscal 2003. Please refer to "Note 17.
Operating Segments and Geographic Information" of Notes to Consolidated
Financial Statements under Item 8 of this Annual Report on Form 10-K for further
discussion of our operating segments.
Communications Products:
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 value-added solutions for our customers. Our
product categories are described below.
Source Lasers: At the front end of the network, a source laser provides the
initial signal that is 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 are installed at both ends of a system. We supply
transceivers in various form factors and specifications to both the data
communications and telecommunications markets.
Transponders: Transponders are transceivers that include electrical
multiplexing and demultiplexing functions. They include 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.
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 cover a wide
range of functionality and are designed to boost WDM and SDH 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.
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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,
including dynamically reconfigurable modules, containing a number of these
components.
Telecommunications Specialty Modules: We supply a number of specialty
products for multi-gigabit fiberoptic systems.
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. We pioneered
the development of swept wavelength systems, which are faster and allow more
measurements over smaller wavelength ranges than previous methods. In fiscal
2002, we introduced our Multiple Application Platform ("MAP"), the next
generation platform for our line of fiberoptic test and measurement
instrumentation. MAP, now with 21 modules, 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.
Network Ready Products: Network Ready Products are a family of
plug-and-play, carrier-class products for metro edge and access applications
including amplification, reach extension, fiber relief, protection switching,
and optical demarcation. They offer a low cost alternative for enabling DWDM and
CWDM networking and new wavelength services. Their simplicity and modularity
also allows carriers and system integrators to quickly respond to emerging
revenue opportunities by deploying new services such as Ethernet and SAN, while
saving operational costs and avoiding sizeable capital expenditures.
The following are some of the significant products introduced by the
Communication Products operating segment during fiscal 2003:
o Fibre Channel and Gigabit Ethernet Transceivers for local area network
and storage area network data communication applications available in
tri-speed (1.25 Gb/s Ethernet, 1 and 2 Gb/s Fibre Channel and Ethernet)
models. The small form factor pluggable transceivers can be installed
while the system is "live" and offer either the patented plastic pull
tab or metal bail latch designs that ease installation in restricted
spaces to enable denser system designs. Some models also feature digital
diagnostic monitoring used for module identification, control and
status.
o 10 Gb/s XENPAK transceivers for high speed data communications
applications. XENPAK refers to a multi-source agreement for form, fit
and function by providing mechanical, electrical and optical standards
and the first 10 Gb/s Ethernet transceiver standard to gain support from
most of the leading vendors.
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o The OA 300, a palm-sized amplifier for metro and access C-band
applications is the tiniest of the OA Series at only 45[ ]70[ ]12 mm and
draws less than 1 W of power. The OA Series is the broadest offering of
standard (off-the-shelf availability) amplifiers in the industry,
offering flexible, scalable amplifier platforms without the cost and
time required for custom development.
o The SWS-OMNI-II and new MAP cassettes were among the new test and
measurement instrumentation products introduced. Based on patented swept
wavelength measurement technology, the SWS-OMNI-II provides high
resolution measurements at a speed that is 10-15 times faster than
previous products. The Multiple Application Platform (MAP) is a modular
test instrument. Nine new cassettes for the MAP were introduced,
bringing the total to 21 and offering a widely scalable, upgradeable,
flexible test instumment for measuring the performance of optical
components.
o CT2 Series 2.5 Gb/s, Small Form Factor Pluggable (SFP) transceiver for
fiberoptic data communications and telecommunications. In addition to
being fully OC-48, OC-12, and OC-3 SONET compliant, the CT2 is designed
for 1310 and 1550 nm wavelengths and for short, intermediate, and long
reach applications. The small, data communications style package meets
the SFP multi source agreement requirements and uses industry standard,
plug-in, LC duplex type optical connectors, which are easy to install
and resistant to damage. Superior performance in critical areas, such as
jitter generation, enables SONET communications, making the CT2 Series
well suited for network edge applications.
o The WaveReady(TM) Series of optical access products can be installed in
minutes and includes a CWDM solution that helps lower network costs for
large enterprises and metro service providers. As network traffic
continues to increase, service providers have been adopting dense
wavelength division multiplexing (DWDM) systems to expand capacity for
metro core applications. For metro access applications, coarse
wavelength division multiplexing (CWDM) typically meets the required
capacity but costs less than DWDM. In addition to CWDM and DWDM, the
WaveReady Series fits a variety of applications including wavelength
services, amplification, protection switching, reach extension,
1310/1550 overlay and Gigabit Ethernet services.
Thin Film Products:
Our Thin Film Products represents the company's center of excellence for
thin film coating and bulk optics capablilities. 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.
The Thin Film Products Group has direct responsibility for leveraging its
technologies into the following markets outside of communications.
Display:
In the display market, we manufacture and sell optical components and front
surface mirrors used in front and rear projection displays, and plasma panel
displays. These display products are used in both in-home and business display
systems.
Custom Optics:
The aerospace and medical/environmental instrumentation markets require
sophisticated, custom, 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
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satellite. Our products in the office automation market include photoreceptors
and front surface mirrors for photocopiers, document scanners, overhead
projectors, facsimile machines and printers.
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 We have also launched a line of products incorporating proprietary
interference technologies to protect brand name luxury goods and prescription
drugs from counterfeits.
We have a line of decorative products that utilize similar 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.
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.
The following are some of the significant products introduced by the Thin
Film Products operating segment during fiscal 2003:
o Spectraflair -- Offerings within our interference pigments product lines
were expanded during the fiscal year to include a fine grade
Spectraflair option designed specifically for spray applications.
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 Fiber Laser Marking Systems -- Our commercial laser division launched a
new line of dual head fiber laser marking systems. These systems
represent a high throughput option to the company's single head systems
and are used in various manufacturing environments to mark components
such as semiconductor chips or fabricated metal parts.
o Display Engines -- Our Ultrex(TM) and DefiniTV(TM) light engine modules
represent world-class performance for brightness, contrast, and price in
both LCOS and DLP-based rear projection display applications. These
products are designed to be used in large screen consumer and business
high definition display applications.
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:
Agilent Technologies ("Agilent"), Avanex, Bookham Technology, Chorum
Technologies, Emcore, Exfo, Finisar, Fujitsu, Furukawa Electric, Intel, New
Focus, Oplink Communications, OpNext, Sumitomo Electric and TriQuint
Semiconductor, Inc. In addition
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to these established companies, we also face competition from emerging start-up
companies, many of which continue to actively pursue our markets,
notwithstanding the continuing economic uncertainty. 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
economic uncertainty and changes within the telecommunications industry, some of
our current and former competitors have sold or discontinued their fiberoptic
communications businesses, and we expect that there will continue to be further
consolidation in our industry.
The following developments in our telecommunications markets during the
past twelve months provide perspective on the dramatic changes occurring in this
industry, in response to the continuing economic uncertainty and the decline in
the telecommunications systems market:
o A year ago, our most significant competitors in the the
telecommunications industry were the optical components divisions of
Nortel, Agere, Corning and Alcatel.
o In November, 2002, Nortel sold its optical components division to
Bookham.
o In January, 2003 Agere sold most of its optical components business to
TriQuint. (We subsequently acquired the undersea pump laser portion of
this business from TriQuint.) Also in January, 2003, Agere sold the
remainder of this business to Emcore.
o In July, 2003 Alcatel and Corning sold their respective optical
components businesses to Avanex.
o As a result of these developments, Nortel, Agere, Corning and Alcatel
are no longer engaged in the optical components business. They have been
succeeded by new participants, such as TriQuint, as well as developing
participants, such as Bookham, Avanex, Emcore, and a host of privately
held companies.
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 to further consolidate their vendor relationships, strengthening ties with
established industry leaders, like us, and eliminate or reduce their dependence
on smaller and less secure suppliers. We believe our broad product portfolio,
financial stability, 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 Thin Film Products Group, we strive to be a principal supplier to
most of our key customers. In the document and product security markets, 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. In our customer optics markets we compete with
companies such as Deposition Sciences, Barr Associates, and Sonoma Photonics. 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.
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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. Maintaining and strengthening these relationships is
particularly critical during the current telecommunications industry
slowdown. Accordingly, the reorganization and focusing of our sales,
customer support, product marketing and development efforts to
strengthen and streamline our customer relationships continues to be a
fundamental aspect of our strategy.
o Maintaining technology leadership to address growth markets. 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. We expect to continue to invest significantly
in new technology and product developments that will allow us to offer
increased efficiency, performance, functionality, and 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 those technologies and applications that
we believe will offer the best solutions for our customers' future
needs.
o Increasing focus on the most promising communications markets while
maintaining capabilities to support our customers throughout the
network. We believe that 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 "end-to-end" 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.
We are responding to our customers' current needs in the metro, access
and enterprise markets while retaining our capabilities for the long
haul terrestrial and submarine markets. 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 provides them with
overall system cost savings potential. Furthermore, we believe that
reducing the amount of integration required to be performed by our
customers allows them to focus on building system architectures, reduce
their cost of development, maintaining core competencies and related
competitive strengths.
o Strengthening and developing opportunities for the markets that we serve
through our Thin Film Products Group. We are increasing our efforts to
capitalize on our core thin film coating and bulk optics competence in
our display, document security, brand security, product differentiation,
medical/environmental intrumentations, printing, and aerospace and
defense markets. Despite the current economic slowdown, our display,
product, security and aerospace and defense businesses have been
relatively stable. For example, people continue investing in new
entertainment systems for their homes. Moreover, as brand name owners
around the world are seeking new ways to keep their products secure, our
sales for security markings have grown. We believe these and other
opportunities for our thin film coating and bulk optics technologies
will be important to our future success as it also helps to maintain our
leadership position in these fields to help meet the needs of our
communications customers.
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
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capacity through a number of initiatives. We have shifted our
manufacturing focus from capacity expansion to maximizing efficiency,
quality, cost reduction and process-focused manufacturing. Consequently,
a critical goal of our Global Realignment Program has been to reorganize
and consolidate our manufacturing operations into those locations best
suited economically, technologically and geographically to manufacture
our products while consistently meeting our customers' quality and
performance requirements. For example, we are moving the manufacturing
of many of our established communications products to our facility in
Shenzhen, China and we are increasing our reliance on low-cost contract
manufacturing partners. When our restructuring is completed, we expect
production to be centralized in designated competency centers in order
to enhance productivity and quality and streamline operations.
o Pursuing complementary mergers and acquisitions. 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, Ciena, Cisco
Systems, Hewlett-Packard, Huawei, IBM, Lucent, Nortel, SBC Communications and
Scientific-Atlanta. Our customers within the Thin Film Products Group include
Agilent, Applied Biosystems, Eastman Kodak, Hitachi, KLA Tencor, Mitsubishi,
SICPA, Sony, Texas Instruments and Toshiba.
During fiscal 2003, Texas Instruments accounted for 12% of net sales.
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.
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 have aligned our sales organization in the
communications business to offer customers a single point of contact for all of
their product requirements, and created 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 2003, 2002 and 2001, we incurred research and development
expenses of $153.7 million, $254.8 million and $325.9 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 products to serve our display, document and product security,
medical/environmental instrumentation and laser markets. 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 increasing our focus on the most
promising markets while maintaining our capability to provide products
throughout the network. We are increasing our emphasis on the
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products needed for metro, access, local area network, storage area network, and
enterprise markets. As a result, we are increasing our investment in
transmission modules and components required in those markets. We are also
responding to our customers' requests for higher levels of integration,
including the integration of optics, electronics and software.
In businesses we serve out of our Thin Film Products Group, 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 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, and components and modules to serve the display and
instrumentation markets.
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 674 as of June 30, 2003, compared to 1,240 at June
30, 2002 and 2,350 as of June 30, 2001. In addition, as part of our Global
Realignment Program, we have and will continue to eliminate overlapping product
development programs 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, 2003. Manufacturing
facilities and products manufactured by our contract-manufacturing partners
(located in San Jose, Texas, Mexico, Thailand and Singapore) are not included in
the table below:
Location Products
-------- --------
NORTH AMERICA:
- --------------
Canada:
Ottawa Wavelength blockers, equalizers, waveguide modules,
dispersion compensation modules, custom modules, circuit
packs, optical performance monitors and instrumentation
and control products
United States:
Commerce, CA Packaging labels for both security and non-security
applications
Horsham, PA(1) Transceivers, transmission modules and CATV
Melbourne, FL Transceivers, transponders and instrumentation products
Mountain Lakes, NJ Precision glass manufacturing
Norwood, MA (1) Specialty fiber manufacturing and fiber component
packaging
Rochester, MN Optical transceivers
San Jose, CA High power pump lasers, source lasers, and waveguides
Santa Rosa, CA Thin film filters, optical display and projection
products, light interference pigments for security and
decorative applications, gas and solid state lasers, and
laser subsystems
Ewing, NJ Photodetectors, receiver products, EDFA, optical
amplifiers and source lasers
Bloomfield, CT Lithium niobate modulators, wavelength lockers and
electronic drivers for telecommunications
EUROPE:
- -------
Netherlands:
Eindhoven(1) Source lasers
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Location Products
-------- --------
REST OF WORLD:
- --------------
Japan:
Atsugi Thin film anti-reflective coatings
China:
Beijing Light interference pigments for security applications
Fuzhou YVO4, display components and specialty optics
Shenzhen Variety of standard optical components and modules
- ------------
(1) As of June 30, 2003, these manufacturing locations have been scheduled for
closure under the Global Realignment Program. Products manufactured at these
locations will be transferred to other locations.
Sources and Availability of Raw Materials
Our intention 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, 2003, we held 849
U.S. patents and 400 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, 2003, our
backlog was approximately $90.5 million as compared to $178.7 million at June
30, 2002. 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 economic uncertainty, 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 5,489 employees as of June 30, 2003, as compared to 9,222 and 19,948
as of June 30, 2002 and June 30, 2001, respectively. The reduction in our
workforce was primarily a result of the Global Realignment Program. Our
workforce as of June 30, 2003 included 3,962 employees in manufacturing, 674
employees in research and development, 516 employees in general and
administrative functions (including information technology, finance and human
resources), and 337 employees in sales and marketing.
Our employees are not represented by any collective bargaining organization
except for our operations in France, Germany and the Netherlands. We have never
experienced a work stoppage, slowdown or strike. Notwithstanding the current
economic slowdown, we consider our employee relations generally to be good.
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Similar to other technology companies, particularly those located in
Silicon Valley, we rely upon our ability to use stock options and other forms of
equity-based compensation as key components of our executive and employee
compensation structure. Historically, these components have been critical to our
ability to retain important personnel and offer competitive compensation
packages. Without these components, we would be required to significantly
increase cash compensation levels (or develop alternative compensation
structures) in order to retain our key employees, particularly as and when an
industry recovery returns. Recent proposals to modify accounting rules relating
to the expensing of equity compensation may require us to substantially reduce,
or even eliminate, all or portions of our equity compensation programs.
Executive Officers
The following sets forth certain information regarding our executive
officers as of September 1, 2003:
Name Age Position
- ---- --- --------
Kevin J Kennedy, Ph.D. 47 Director and Chief Executive Officer
Jozef Straus, Ph.D. 57 Director, Founder Emeritus and Advisor to the CEO
Syrus P. Madavi 54 Director, President and Chief Operating Officer
Ronald C. Foster 52 Executive Vice President and Chief Financial Officer
Joseph C. Zils 49 President, Thin Film Products Group
Donald E. Bossi, Ph.D. 40 President, Transmission Group
Mark S. Sobey, Ph.D. 43 Senior Vice President, Global Sales and Marketing
Stan Lumish, Ph.D. 46 Chief Technology Officer for Communications
Christopher S. Dewees 39 Senior Vice President and General Counsel
Jo Major, Ph.D. 41 Senior Vice President, Component Products Group
Kevin Kennedy became a member of the Board in November 2001, and upon the
retirement of Dr. Jozef Straus, became our Chief Executive Officer on September
1, 2003. From August 2001 to August 2003, Dr. Kennedy was the Chief Operating
Officer of Openwave Systems, Inc. Prior to joining Openwave Systems, Inc., Dr.
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. Dr. Kennedy is also a director of
Quantum Corporation, Rambus Corporation and Openwave Systems, Inc.
Jozef Straus served as Co-Chairman of the Board from July 1999 to September
1, 2003 when he resigned his position as Co-Chairman. Dr. Straus continues to
serve as a member of the Board. Dr. Straus served as our Chief Executive Officer
from May 2000 until his retirement on September 1, 2003. Dr. Straus was also
President from June 2001 until July 2002, and was Chief Operating Officer
following the merger with JDS FITEL in July 1999. 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.
Syrus P. Madavi joined the Company in July 2002 as President and Chief
Operating Officer and became a member of the Board in February 2003. Prior to
joining the Company, Mr. Madavi served as Vice President and then Senior Vice
President of Texas Instruments Inc. from August 2000 until April 2002.
Previously Mr. Madavi was President and Chief Executive Officer of Burr-Brown
Corporation from March 1994 until its acquisition by Texas Instruments Inc. in
August 2000. Mr. Madavi also served as chairman of the Board of Burr-Brown
Corporation from 1998 until August 2000. Prior to joining Burr-Brown
Corporation, Mr. Madavi was employed at Raytheon Corporation from 1990 to 1994,
where he served as President of the Semiconductor Division during his final two
years. Mr. Madavi also served as Corporate Vice President and General Manager of
Honeywell Signal Processing Technologies from 1984 to 1989. Mr. Madavi holds a
B.S.E.E. degree and a M.S. in Computer Science from Stevens Institute of
Technology, and a M.B.A. in Finance from the University of California at Los
Angeles.
Ronald C. Foster joined JDS Uniphase in February 2003 as Executive Vice
President and Chief Financial Officer. Before joining JDS Uniphase, Mr. Foster
was Chief Financial Officer of Novell Corporation from July 2001 until February
2003, prior to which he served as Novell Corporation's Vice President of Finance
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from November 1998 until his promotion to Chief Financial Officer. Mr. Foster
served as Group Controller and then Vice President, Operations Controller with
Applied Materials Corporation from 1996 to 1998, and was employed as Vice
President of Operations at Egghead Software Corporation from 1995 until 1996.
Mr. Foster held various finance positions with Hewlett Packard Corporation
("HP") from 1985 until 1995, culminating in his service as Group Controller for
HP's Computer Manufacturing and Distribution Group. Prior to HP, Mr. Foster held
various finance and operations related positions in the forest products
industry. Mr. Foster holds an MBA degree from the University of Chicago and a BA
in Economics from Whitman College.
Joseph C. Zils has served as the President of our Thin Film Products Group
since March 2000. Prior to our acquisition of Optical Coating Laboratory, Inc.
in February 2000, Mr. Zils served as Vice President, General Counsel and
Corporate Secretary of Optical Coating Laboratory, Inc. from December 1993 to
March 2000. Mr. Zils earned a BA in Economics from the University of California,
Santa Cruz and a JD degree from the University of San Diego.
Donald E. Bossi has served as the President of our Transmission Group since
April 2002. From September 2001 to March 2002, Dr. Bossi was President of the
Active Components Group, 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.
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 Dynamics, Inc. Prior to
E-TEK Dynamics, Inc., Dr. Sobey was Vice President/General Manager with
Spectra-Physic, Inc.
Stan Lumish has served as our Chief Technology Officer for Communications
since July 2003. From July 2002 until June 2003, Dr. Lumish served as the
President of our Optical Layer Group. 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 joining JDS
Uniphase, Dr. Lumish held management positions with Lucent Technologies Inc.,
where he received the Bell Labs Fellow award.
Christopher S. Dewees has served as our Senior Vice President and General
Counsel since July 2003. From February 2003 until July 2003, Mr. Dewees served
as Vice President and General Counsel, prior to which he was Acting General
Counsel from October 2002 until February 2003. Mr. Dewees joined our Legal
Department in October 1999. Prior to October 1999, Mr. Dewees was employed at
Morrison & Foerster LLP, where he represented JDS Uniphase, and other Silicon
Valley public and private companies. Mr. Dewees earned his A.B. degree from
Dartmouth College in 1986, and his J.D. degree from Northwestern University in
1989.
Jo Major has served as our Senior Vice President, Component Products Group,
since July 2003. From September 2002 to July 2003, Dr. Major was Vice President,
Active Components Business Unit. From February 2001, when he joined JDS Uniphase
as a result of our merger with SDL, Inc., to September 2002, Dr. Major served in
various management roles within our Active Components Group. Between 1990 and
February 2001 Dr. Major was employed by SDL, Inc. in a variety of technical
managerial positions. Dr. Major holds a B.S., with high honors, M.S. and Ph.D.
from the University of Illinois, and has been granted industry awards for the
development of 980nm lasers, high power near-infrared lasers, Raman amplifiers
and high performance laser packaging. Dr. Major was an Intel Fellow from 1988 to
1990.
Risk Factors
The continuing unstable economic environment has significantly harmed and may
continue to significantly harm our industries
Our sales levels are unstable, we are not currently profitable, and we have
difficulty predicting future operating results
As a result of continuing unfavorable economic and market conditions,
particularly in the communications sector (but also in our non-communications
business), our sales have declined significantly from historic levels, we are
not currently profitable, and we are unable to predict future sales accurately
or to provide long-term guidance
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for future financial performance. Historically, our communications business was
the more affected business; however, recently, these unfavorable conditions are
increasingly impacting our non-communications businesses. The conditions
contributing to this difficulty include:
o uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon which our telecommunications systems
manufacturing customers, and ultimately we, depend for a substantial
amount of our sales;
o the weakened financial condition of many major telecommunications
carriers and their current limited access to the capital required for
expansion;
o continued reduction in inventory levels by our telecommunications
systems manufacturing customers;
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
communications sales and profits;
o uncertainty regarding the growth and profitability of the security
display and commercial laser markets, which are responsible for a
substantial portion of our non-communications sales and profits; and
o general market and economic uncertainty.
Based on these and other factors, many of our major customers have reduced,
modified, cancelled or rescheduled orders for our products and have expressed
uncertainty as to their future requirements. In the communications business,
this uncertainty is reflected in the limited and highly variable forecasts our
customers are providing of their anticipated needs for our communications
products. As a result, our net sales in the future are likely to fluctuate and
may, in fact, decline, and we anticipate that we will continue to be
unprofitable in the near future. 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 customers' businesses have been harmed by the economic downturn
Our communications 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 manufacturing 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 a
supplier of the components and modules for these systems, our ability to predict
our financial results or business prospects for future periods is severely
limited.
Our Global Realignment Program may be unsuccessful in aligning our operations
to current market conditions
In response to 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 facilities from multiple sites into
single locations, as well as consolidating sales and administrative
functions;
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
C-20
to incur significant costs (including cash expenditures) 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 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. 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.
Our cost reduction programs may be insufficient to achieve long-term
profitability
We are undertaking cost reduction measures, under and in addition to the
Global Realignment Program, intended to reduce our expense structure at both the
cost of goods sold and the operating expense levels. We believe these measures
are a necessary response to, among other things, declining average sales prices
across our product lines. These measures may be unsuccessful in creating profit
margins sufficient to sustain our current operating structure and business.
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 products,
we have written down a substantial portion of our inventory as our sales
forecasts continued to decline. We generally use a rolling six-month forecast
based on anticipated product orders, product order history, forecasts and
backlog to assess our inventory requirements. However, as discussed above, our
ability to forecast our customers' needs for our products in the current
economic environment is very limited. Consequently, we have incurred, and may in
the future incur, charges to write down our inventory. We recorded charges of
$56.1 million and $203.9 million related to excess and obsolete inventory during
fiscal 2003 and 2002, respectively. We may incur such 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, 2003, 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.
Any failure of our major telecommunications systems manufacturing 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 that followed, both
capital 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 manufacturing 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 past two years, 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 businesses, and consequently ours. As long as these
companies are focused on debt concerns, they are less likely to acquire
telecommunications systems.
If our customers fail to meet their financial obligations to us, our business
will suffer
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 current economic environment. Based
on our estimates as to the quality of our accounts receivable, we maintain
allowances for
C-21
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 financial condition and operating results.
Moreover, the continuing economic slowdown has exacerbated our
vulnerability to demand fluctuations for our communications products.
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, is jeopardized. Currently, while generally
increasing demand for Internet access is apparent, less evident is when order
capacity will be absorbed. 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 communications
products.
Ultimately, should long-term expectations for Internet growth and bandwidth
demand not be realized, our 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, light interference pigment and other
businesses served out of our Thin Film Products Group, depends significantly on
the continued stability or growth and 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 will continue. In recent periods, we have
experienced reduced demand for some of our non-communications products,
particularly our display components sold to Texas Instruments. We expect this
reduced demand to continue for the near term. Among other things, we are working
to develop additional profitable applications for our interference pigments and
display components and modules. If we fail, these businesses will suffer.
Moreover, we cannot predict the impact of technological or other changes in
these industries on our business. In addition, each of our non-communications
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.
C-22
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 businesses as well as the
businesses that we serve out of the Thin Film Products group have historically
grown, at times rapidly, and we have grown accordingly. We have made and,
although we remain in an industry slowdown, expect in the future to make
significant investments to enable our future growth through, among other things,
internal expansion programs, product development, 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. Through our Global Realignment Program and other cost reductions
measures we are balancing the need to shrink our operations consistent with the
current economic conditions with the need to preserve our ability to grow and
scale our operations when our markets recover. If we fail to achieve this
balance, our business will suffer to the extent our resources and operations are
insufficient to respond to a return to growth.
If we fail to commercialize new product lines, our business will suffer
We intend to continue to develop new product lines and improve existing
ones 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;
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, is uncompetitive, or because the
product has been superceded by another product or technology; or
o we may fail to anticipate or respond to new technologies that could have
a disruptive impact on our business.
Nonetheless, if we fail to successfully develop and introduce new products
and improve existing ones, our business will suffer. We have considerably
reduced our research and development spending from historic levels and some of
our competitors now spend considerably higher percentages of their revenues on
research and development than do we.
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 increased sales sufficient to offset the additional expenses
resulting from this increased infrastructure. In connection with our many
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.
Changes in accounting rules have had and may continue to have a material effect
on our financial results
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 APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under this method, we recognized
compensation charges related to stock compensation plans of $50.9 million,
$124.9 million and $52.6 million in fiscal 2003, 2002 and 2001, respectively. In
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," we
provide disclosures of our operating results as if the fair value method of
accounting had been applied in our Annual Report on Form 10-K. Beginning in the
third quarter of fiscal 2003, we provide such disclosures in our Quarterly
Reports on Form 10-Q in accordance with SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." Had we accounted for our
compensation expense under the fair value method of accounting prescribed by
SFAS No. 123, the charges would
C-23
have been significantly higher than the intrinsic value method used by us,
totaling $685.2 million, $688.9 million and $566.2 million during fiscal 2003,
2002 and 2001, respectively. Currently, the FASB is considering changes to
accounting rules concerning the recognition of stock option compensation
expense. If 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 increasing our losses by the
additional amount of such stock option charges.
Implementation of FASB Interpretation No. 46 could affect our financial results
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires an
investor with a majority of the variable interests (primary beneficiary) in a
variable interest entity to consolidate the assets, liabilities and results of
operations of the entity. A variable interest entity is an entity in which the
equity investors do not have a controlling interest or the equity investment at
risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. Interpretation No.
46 is applicable: (i) immediately for all variable interest entities created
after January 31, 2003; or (ii) in the first fiscal year or interim period
beginning after June 15, 2003 for those created before February 1, 2003.
The Company is currently reviewing its cost and equity method investments
and other variable interests acquired prior to February 1, 2003 to determine
whether those entities are variable interest entities and, if so, if the Company
is the primary beneficiary of any of its investee companies. At June 30, 2003,
the Company had 23 cost and equity method investments primarily in privately
held companies and venture funds that have the potential to provide strategic
technologies and relationships to the Company's businesses. The Company expects
to complete the review during the first quarter of fiscal 2004. Provided the
Company is not the primary beneficiary, the Company's maximum exposure to loss
for these investments at June 30, 2003 is limited to the carrying amount of its
investment of $37.6 million in such entities and its minimum funding commitments
of $21.4 million. The consolidation of any investee companies under
Interpretation No. 46 could adversely affect the financial position and results
of operations of the Company.
Our total net sales are dependent upon a few key customers
A few large customers account for most of our total net sales. During
fiscal 2003, Texas Instruments accounted for 12% of our total net sales. During
fiscal 2002, no customer accounted for more than 10% of our total net sales.
During fiscal 2001, Nortel, Alcatel and Lucent accounted for 14%, 12% and 10% of
our total net sales, respectively. 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 total net sales. Dependence on a limited
number of customers exposes us to the risk that order reductions from any one
customer can have a material adverse effect on periodic revenue. In fiscal 2003,
we experienced a dramatic decline in our sales to Texas Instruments, from $23.5
million (15% of quarterly revenue) in the second quarter of the year to $14.4
million (less than 10% of quarterly revenue) in the fourth quarter of the year.
Moreover, many of our customers are currently experiencing significant revenue
declines and, in recent periods, have significantly reduced their orders from
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 some of 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 industries, the competition remains fierce. To
remain
C-24
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
manufacturing customers evaluate our products and competitive products for
deployment in their telecommunications systems. Similarly, 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, can significantly
harm our business.
The businesses we serve through our Thin Film Products Group (e.g.,
display, medical/environmental instrumentation, document security, product
security, aerospace and defense, and lasers) 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. Currently, we are working to develop new products for
use in the commercial laser and flat panel display markets, markets with
significant existing and developing competition. Our success or failure in these
efforts will have a material impact on our non-communications business. 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. The recent consolidations of
Bookham and Nortel Network's optical components business and of Avanex and
Corning's and Alcatel's respective optical components businesses are recent
examples of high profile consolidations. We anticipate that consolidation will
continue as a result of the current industry downturn. In addition, industry
consolidation may result in stronger competitors who are able to compete better
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 systems
manufacturing customers and 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
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.
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 environment 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 future 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 future 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 past two years or are otherwise in financial
distress.
C-25
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.
We are also experiencing pricing pressure in the businesses we serve
through our Thin Film Products Group (e.g., display, medical/environmental
instrumentation, document security, product security, aerospace and defense, and
lasers), as a result of improved internal sourcing capabilities within some of
our customers, declining demand for some of our products and increased
competition.
In response to declining average sales prices, we are undertaking cost
reduction measures, under and in addition to the Global Realignment Program,
intended to reduce our expense structure at both the cost of goods sold and the
operating expense levels. These measures may be unsuccessful in creating profit
margins sufficient to sustain our current operating structure and business. In
addition to direct cost cutting, we must continue to: (i) timely develop and
introduce new products that incorporate features that enable such products to be
less price sensitive, and (ii) increase the efficiency of our manufacturing
operations. Failure to do so could cause our sales and profit margins to further
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. Competition for highly skilled technical people is extremely intense,
and, the current economic environment 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 management
team and other key management and technical personnel, each of whom would be
difficult to replace. The loss of services of these or other executive officers
or key personnel or the inability to continue to attract qualified personnel
could have a material adverse effect on our business.
As a consequence of the current economic environment and as part of our
Global Realignment Program, we have reduced our global workforce to 5,489
employees as of June 30, 2003. We cannot predict the impact our recent workforce
reductions and any other reductions we are compelled to make in the future will
have on our ability to attract and retain key personnel.
Similar to other technology companies, particularly those located in
Silicon Valley, we rely upon our ability to use stock options and other forms of
equity-based compensation as key components of our executive and employee
compensation structure. Historically, these components have been critical to our
ability to retain important personnel and offer competitive compensation
packages. Without these components, we would be required to significantly
increase cash compensation levels (or develop alternative compensation
structures) in order to retain our key employees, particularly as and when an
industry recovery returns. Recent proposals to modify accounting rules relating
to the expensing of equity compensation may cause us to substantially reduce, or
even eliminate, all or portions of our equity compensation programs.
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 to our manufacturing processes or
those of our suppliers, or the 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 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
C-26
advanced manufacturing techniques to improve product volumes and yields and
reduce costs, and (ii) realign some of our product manufacturing facilities 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, we are currently 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. We expect that consolidation and product
relocations may continue for the forseable future. The manufacturing lines for
relocated products 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. Our expectations as to the time
periods required to qualify (or requalify) a product line and ship products in
volumes to customers may be erroneous. Delays in qualification can cause a
product to be dropped from a long-term supply program. These delays will also
impair the expected timing, and may impair the expected amount, of sales of the
affected products. Nevertheless, we may, in fact, 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. Our products are highly complex and, as such susceptible to design
and manufacturing defects. To guard against this, our products are rigorously
tested for quality both by our customers and us. Nevertheless, 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. We have in the past increased our warranty
reserves and have incurred significant expenses relating to certain
communications products. 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 the products we design, manufacture and
distribute through our Thin Film Products Group 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.
C-27
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, one of our major customers in the Thin Film
Products Group, for the marketing and sale of our light interference pigments
used to provide security features in currency. Under a license and supply
agreement, we rely exclusively on SICPA to market and sell to this market
worldwide. 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.
If our contract manufacturers fail to deliver quality products at reasonable
prices and on a timely basis, our results of operations and financial conditions
could be harmed
We are increasing our use of contract manufacturers as an alternative to
our own manufacturing of products. If these contract manufacturers do not
fulfill their obligations to us, or if we do not properly manage these
relationships and the transition of production to these contract manufacturers,
our existing customer relationships may suffer. In addition, by undertaking
these activities, we run the risk that the reputation and competitiveness of our
products and services may deteriorate as a result of the reduction of our
control over quality and delivery schedules. We also may experience supply
interruptions, cost escalations and competitive disadvantages if our contract
manufacturers fail to develop, implement or maintain manufacturing methods
appropriate for our products and customers.
Our supply chain and manufacturing process relies on accurate forecasting
to provide us with optimal margins and profitability. Because of market
uncertainties, forecasting is becoming much more difficult. In addition, as we
come to rely more heavily on contract manufacturers, we may have fewer personnel
resources with expertise to manage these third-party arrangements.
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. For
example, we currently utilize a sole source for the crystal semiconductor chip
sets incorporated in our solid-state microlaser products. We obtain lithium
niobate wafers, gallium arsenide wafers, specialized fiber components and some
lasers used in our telecommunications products primarily from limited source
suppliers. 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 currently 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, sales and customer
support operations. Our operations outside North America include facilities in
Europe and Asia-Pacific.
C-28
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 potential adverse tax consequences.
Net sales to customers outside North America accounted for 30%, 26% and 32%
of our total net sales in fiscal 2003, 2002 and 2001, respectively. We expect
that sales to customers outside 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
customers depend on international sales and consequently further expose 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 operating results or business. However, 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 operating results.
We are increasing manufacturing operations in China, which expose us to risks
inherent in doing business in China
As a result of our Global Realignment Program and in an effort to reduce
costs, we have increased our manufacturing 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 Chinese 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 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 and in an effort
to reduce costs, we continue to increase the scope and extent of our
C-29
manufacturing operations in our Shenzhen facilities. Accordingly, we expect that
our ability to operate successfully in China will become increasingly important
to our overall success. As we continue to consolidate our manufacturing
operations, we will incur additional costs to transfer product lines to the
facilities located in China, which could have a material adverse impact on our
operating results and financial condition.
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 and export license fees in the future. In the
event that we are required to pay other taxes, customs duties and export license
fees in China, 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 U.S. 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.
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 terrorist attacks on September 11, 2001 created many
economic and political uncertainties, and intensified the global economic
downturn. Any future terrorist activities 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. 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
with 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 failure 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.
C-30
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, our competitors and other large
technology-based companies, 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 of both. 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
property 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, from time to time, may in the future receive notices from third parties
claiming that our products infringe upon third-party proprietary rights. As the
downturn in the communications industries deepened and continued over the past
two years, many companies have turned to their intellectual property portfolios
as an alternative revenue source. This is particularly true of companies which
no longer compete with us. Many of these companies have larger, more established
intellectual property portfolios than ours. Typical for a growth-oriented
technology company, at any one time we generally have various pending 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 are invalid. However, as economic uncertainty continues, the level of
patent infringement disputes in which we are engaged and expect to be engaged
for the foreseeable future has increased. While in the past the settlement and
disposition of these disputes has not had a material adverse impact on our
business or financial condition, this may not be the case in the future.
Further, the litigation or settlement of these matters, regardless of the merit
of the claims, could result in significant expense to us and divert the efforts
of our technical and management personnel, whether or not we are successful. If
we are unsuccessful, we could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology that
is the subject of the litigation. We may not be successful in such development
or such licenses may not be available on terms acceptable to us, if at all.
Without such a license, we could be enjoined from future sales of the infringing
product or products.
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 Europe,
Asia-Pacific or Latin America, may not protect our products and intellectual
property rights to the same extent as the laws of the United States.
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We face certain litigation risks that could harm our business
We have had numerous lawsuits filed against us asserting various claims,
including 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 and 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, have been
significant, will continue to be costly 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 against claims relating to the conduct of our business.
Historically, this insurance covered, 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 the insurance coverage. Over the
last several years, the premiums we have paid for this insurance have increased
substantially. One consequence of the current economic environment and decline
in stock prices has been a substantial 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,
raised retentions (that is, the amount of liability that a company is required
to 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.
The insurance policies that may cover the current securities lawsuits
against us have a $10 million retention. As a result, the costs we incur in
defending the current securities lawsuits against us may not be reimbursed until
they exceed $10 million. The policies that would cover any future lawsuits may
not provide any coverage to us and may cover the directors and officers only in
the event we are unable to cover their costs in defending against and resolving
any future claims. In fact our current policy only covers our directors and
officers and is only applicable under circumstances in which the Company is
unable to or prohibited from paying claims accrued during the policy period. As
a result, our costs in defending or settling any future lawsuits or paying any
judgments arising therefrom could increase significantly and could materially
impair the Company's financial condition.
Each year we negotiate with insurers to renew our director and officer
insurance. Particularly in the current economic environment, we cannot assure
you that in the future 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 or existing 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.
C-32
Recently enacted and proposed regulatory changes may cause us to incur
increased costs
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002,
will increase our expenses as we evaluate the implications of new rules and
devote resources to respond to the new requirements. In particular, we expect to
incur additional SG&A expense as we implement Section 404 of the Sarbanes-Oxley
Act, which requires management to report on, and our independent auditors to
attest to, our internal controls. The compliance of these new rules could also
result in continued diversion of management's time and attention, which could
prove to be disruptive to normal business operations. Further, the impact of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors or as executive officers,
which could harm our business.
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
often 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. 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 may 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 Networks, Adept and ADVA, and have limited funds invested
in private venture funds. All three companies have experienced severe stock
price declines during the economic downturn, which have greatly reduced the
value of our investments, and we have written down the value of these
investments as the decline in fair value was deemed to be other-than-temporary.
During fiscal 2003, we have written down the value of our Adept investment to $0
and recorded impairment charges of $25.0 million. 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. In addition
to our investments in public companies, we have in the past and expect to
continue to make investments in privately held companies for strategic and
commercial purposes. For example, we had a commitment to provide additional
funding of up to $21.4 million to certain venture capital investment
partnerships as of June 30, 2003. 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 in
our business operations. Currently, we are incurring substantial costs
associated with restructuring our business and operations under our Global
Realignment Program. Although we believe our existing cash balances 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
C-33
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 or may be dilutive to our
stockholders.
Our rights plan and our ability to issue additional preferred stock could harm
the rights of our common stockholders
In February 2003, we amended and restated our Stockholder Rights Agreement
and currently each share of our outstanding common stock is associated with one
right. Each right entitles stockholders to purchase 1/100,000 share of our
Series B Preferred Stock at an exercise price of $21.
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 1/100,000 share of Series B
Preferred Stock or one share of common stock per right. The rights expire on
June 22, 2013.
Our Board of Directors has the authority to issue up to 499,999 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.
C-34
ITEM 2. PROPERTIES
Our principal offices are located in San Jose, California, United States.
The table below summarizes the properties that we owned and leased as of June
30, 2003:
Leased Properties:
Location Square footage
- -------- --------------
NORTH AMERICA:
- --------------
Canada:
Goulbourn (1) 20,120
Markham (1) 25,712
Ottawa (1) 166,089
United States:
Allentown, PA 11,274
Asbury, NJ (1) 5,467
Bloomfield, CT 60,000
Commerce, CA 27,136
Durham, NC (1) 1,000
Eatontown, NJ (1) 84,000
Ewing Township, NJ 132,300
Freehold, NJ (1) 15,965
Horsham, PA (1) 126,500
Melbourne, FL 109,000
Milpitas, CA 69,702
Mountain Lakes, NJ 20,000
Nashua, NH 2,611
Norwood, MA 20,800
Parsippany, NJ 14,600
Piscataway, NJ (1) 132,650
Raleigh, NC (1) 178,000
Richardson, TX (1) 23,400
San Jose, CA 439,060
Santa Barbara, CA 270
Santa Clara, CA (1) 46,338
Santa Rosa, CA 71,339
Windsor, CT (1) 165,000
Yardley, PA 2,468
Owned Properties:
Location Square footage
- -------- --------------
NORTH AMERICA:
- --------------
Canada:
Ottawa 948,900
United States:
Bloomfield, CT 24,000
Columbus, OH (1) 107,000
Rochester, MN 40,500
Santa Rosa, CA 638,117
West Trenton, CT (1) 72,300
Location Square footage
- -------- --------------
EUROPE:
- -------
Italy:
Monza 1,000
France:
Les Ulis 3,800
Grenoble 10,226
Germany:
Eching 8,712
Netherlands:
Eindhoven 137,094
United Kingdom:
Oxford (1) 9,900
REST OF WORLD:
- -------------
China:
Beijing 75,347
Fuzhou 247,314
Hong Kong 2,914
Shenzhen 419,395
Japan:
Atsugi 9,200
Tokyo 859
---------
Total leased square footage: 2,895,562
Location Square footage
- -------- --------------
EUROPE:
- -------
United Kingdom:
Plymouth (1) 114,473
REST OF WORLD:
- --------------
China:
Fuzhou (1) 84,163
Taiwan:
Taipei (1) 231,166
---------
Total owned square footage: 2,260,619
5,156,181
Total leased and owned square footage: =========
- ------------
(1) We have completely vacated these properties and are in the process of
vacating additional properties as part of our Global Realignment Program.
C-35
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, 2003, approximately 2.2
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, the first of numerous federal securities class
actions was filed against us and several of our current and former officers and
directors. On July 26, 2002, the Northern District of California consolidated
all the securities actions then filed in or transferred to that court 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.
An amended consolidated complaint was filed on October 11, 2002. It
purports to be brought on behalf of a class consisting of those who acquired our
securities from July 27, 1999 through July 26, 2001, as well as on behalf of
subclasses consisting of those who acquired our common stock pursuant to our
acquisitions of OCLI, E-TEK and SDL. The complaint seeks unspecified damages and
alleges various violations of the federal securities laws, specifically Sections
10(b), 14(a), 20(a) and 20A of the Securities Exchange Act of 1934 and Sections
11, 12(a)(2), and 15 of the Securities Act of 1933. It also names one of our
stockholders as a defendant. On December 13, 2002, we moved to dismiss the
amended consolidated complaint. On March 14, 2003, the court dismissed the
complaint with leave to amend. No trial date has been set.
On July 26, 2002, a securities class action captioned Zelman v. JDS
Uniphase Corp., 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 alleged 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 action was transferred to the Northern
District of California on September 11, 2002, and assigned a Northern District
case number, No. C-02-4656 MJJ. On October 31, 2002, the district court related
the action to In re JDS Uniphase Corporation Securities Litigation, but did not
consolidate the two actions. On January 7, 2003, the Court appointed Shirley
Zelman lead plaintiff. The plaintiff has agreed that JDSU need not respond to
the complaint at this time. No trial date has been set.
The Derivative Actions:
Eleven 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. The actions seek unspecified damages and no trial date has
been set in any of them. Several of the actions have been consolidated,
resulting in the following surviving actions: In re JDS Uniphase Corporation
Derivative Litigation, Master File No. CV806911, filed April 11, 2002, in
California Superior Court for the County of Santa Clara; Corwin v. Kaplan, No.
C-02-2020 CW, filed April 24, 2002, in the District Court for the Northern
District of California; and Cromas v. Straus, Civil Action No. 19580, filed
April 25, 2002, in the Delaware Court of Chancery for New Castle County.
In the Corwin case, we moved to dismiss on December 13, 2002. On March 14,
2003, the court dismissed the complaint with leave to amend and set a schedule
for the filing of an amended complaint. No trial date has been set.
In In re JDS Uniphase Corporation Derivative Litigation, plaintiffs filed a
consolidated amended derivative complaint on March 13, 2003. That complaint
asserted claims for breach of fiduciary duty, waste of corporate assets,
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abuse of control, gross mismanagement, unjust enrichment, and constructive fraud
against us and certain of our current and former officers and directors. The
complaint also asserted claims for violation of California Corporations Code
Sections 25402 and 25502.5 against defendants who sold JDSU stock and asserts
claims for breach of contract, professional negligence, and negligent
misrepresentation against our auditors, Ernst & Young. On June 10, 2003, the
Court stayed the action pending resolution of the federal actions. On August 21,
2003, the court scheduled a case management conference for November 25, 2003. No
trial date has been set in either the state or federal court actions.
In the Cromas case, no proceedings have occurred to date.
The OCLI Shareholder Action:
On February 3, 2003, an action captioned Pang v. Dwight, No. 02-231989, was
filed in California Superior Court for the County of Sonoma. The complaint
purports to be brought on behalf of a class of former shareholders of OCLI who
exchanged their OCLI shares for JDSU shares when JDSU acquired OCLI. The
complaint names the former directors of OCLI as defendants and asserts causes of
action for breach of fiduciary duty and breach of the duty of candor. The action
seeks unspecified damages, and no trial date has been scheduled. As discussed
below, the petitions to coordinate this action with the SDL Actions and In re
JDS Uniphase Corporation Derivative Litigation were denied.
The SDL Shareholder Actions
Three actions have been filed in California Superior Court for the County
of Santa Clara by stockholders purporting to represent a class of former
shareholders of SDL who exchanged their SDL shares for JDSU shares when JDSU
acquired SDL. The complaints name the former directors of SDL as defendants,
assert causes of action for breach of fiduciary duty and breach of the duty of
disclosure, and seek unspecified damages. These actions include: Cook v Scifres,
No. CV814824, filed February 18, 2003, Anish v. Scifres, No. CV815738, filed
March 24, 2003, and Vajdos v. Scifres, No. CV816087, filed April 7, 2003. On
April 4, 2003, the plaintiff in Cook moved to consolidate the actions and to
appoint the law firm of Milberg Weiss as lead counsel for plaintiffs. On May 5,
2003, the defendants in the Cook action petitioned the Judicial Council to
coordinate the SDL actions with the OCLI action in Santa Clara County Superior
Court. On June 30, 2003, defendants in the Cook action petitioned to coordinate
the other SDL actions and the OCLI action with In re JDS Uniphase Corporation
Derivative Litigation.
On August 19, 2003, the court held a hearing on the motion to consolidate
and for appointment of lead counsel and the petitions to coordinate. The court
granted the motion to consolidate the SDL Actions with each other and appointed
the law firms of Milberg Weiss and Stull, Stull & Brody as lead counsel. The
court denied the petitions to coordinate the SDL Actions with the OCLI
Shareholder Action or with In re JDS Uniphase Corporation Derivative Litigation.
On August 21, 2003, the court scheduled a case management conference for
November 25, 2003.
We believe that the factual allegations and circumstances underlying these
securities class actions, derivative actions, and the OCLI and SDL actions are
without merit. The cost of defending these lawsuits has been costly, will
continue to be costly, and 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 prove to be time consuming and disruptive to normal
business operations. There can be no assurance that we will prevail or that the
cost of defending these lawsuits will be covered by our insurance policies. An
unfavorable outcome or settlement of this litigation could have a material
adverse effect on our financial position, liquidity or results of operations.
We are a party to other litigation matters and claims, which are normal in
the course of 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, liquidity, or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Stock 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 15th, 2003, we had 1,434,259,133 shares of common stock
outstanding, including 66,093,931 exchangeable shares. The closing price on
August 15th, 2003 was $3.04 for the common stock and Canadian $4.29 for the
exchangeable shares. The following table summarizes the high and low closing
sales prices for our common stock as reported on the NASDAQ Stock Market during
fiscal 2003 and 2002:
High Low
------ -----
Fiscal 2003:
Fourth Quarter $ 4.28 $2.86
Third Quarter 3.28 2.53
Second Quarter 3.41 1.62
First Quarter 3.84 1.87
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
As of August 15th, 2003, we had 8,763 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial information for each of the
last five fiscal years (in millions, except per-share data):
Years Ended June 30,
--------------------------------------------------------------------
2003 2002 (1) 2001 (2)(3) 2000 (4) 1999
------- ---------- ----------- --------- -------
Consolidated Statement of Operations Data:
Net sales $ 675.9 $ 1,098.2 $ 3,232.8 $1,430.4 $ 282.8
Amortization of goodwill and other intangibles 19.8 1,308.7 5,387.0 896.9 15.7
Acquired in-process research and development 0.4 25.3 393.2 360.7 210.4
Reduction of goodwill and other long-lived assets 393.6 5,979.4 50,085.0 -- --
Restructuring charges 121.3 260.0 264.3 -- --
Loss from operations (900.7) (8,284.0) (56,347.4) (865.1) (153.2)
Net loss (933.8) (8,738.3) (56,121.9) (904.7) (171.1)
Net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40) $ (1.27) $ (0.54)
June 30,
--------------------------------------------------------------------
2003 2002 (1) 2001 (2)(3) 2000 (4)(5) 1999
------- ---------- ----------- --------- -------
Consolidated Balance Sheet Data:
Working capital $1,091.8 $1,374.8 $ 2,187.8 $ 1,325.7 $ 314.8
Total assets 2,137.8 3,004.5 12,245.4 26,389.1 4,096.1
Long-term obligations 16.3 8.9 18.0 61.2 9.8
Total stockholders' equity 1,671.1 2,471.4 10,706.5 24,778.6 3,619.3
- ------------
(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Industry Environment
The downturn in the telecommunications industry, which began in early 2001
continued through fiscal 2003. The principal causes of the downturn, network
overcapacity, constrained capital markets, financial difficulties among the
major telecommunications carriers and regulatory hurdles impeding competitive
access to telecommunication infrastructure, among others, continued to prevent a
recovery. Inventory levels, a legacy of the explosive growth experienced during
the late 1990s and 2000, remained high through fiscal 2003. Debt restructuring
and cost-cutting measures, which have contributed to lower average selling
prices, continued to be a primary priority for companies at all levels of the
industry. The year was highlighted by the departure of several of our
established telecommunication industry competitors through consolidating
transactions.
The following developments in our telecommunications markets during the
past twelve months provide perspective on the dramatic changes occurring in this
industry, in response to the continuing economic uncertainty and the decline in
the telecommunications systems market:
o A year ago, our most significant competitors in the the
telecommunications industry were the optical components divisions of
Nortel, Agere, Corning and Alcatel.
o In November, 2002, Nortel sold its optical components division to
Bookham.
o In January, 2003 Agere sold most of its optical components business to
TriQuint. (We subsequently acquired the undersea pump laser portion of
this business from TriQuint.) Also in January, 2003, Agere sold the
remainder of this business to Emcore.
o In July, 2003 Alcatel and Corning sold their respective optical
components businesses to Avanex.
o As a result of these developments, Nortel, Agere, Corning and Alcatel
are no longer engaged in the optical components business. They have been
succeeded by new participants, such as TriQuint, as well as developing
participants, such as Bookham, Avanex, Emcore, and a host of privately
held companies.
The impact of industry consolidation, continued inventory reductions among
our customers, increasing debt concerns at the systems manufacturer and carrier
levels, network overcapacity, and limited access to capital for network
installation and expansion continues to severely harm our business. While the
declines have slowed substantially and we have seen signs of stability in the
market recently, we do not anticipate any significant recovery in the near
future.
Nevertheless, we believe the telecommunications industry will ultimately
improve from the current economic slowdown and grow in the future for several
reasons:
o Internet traffic, an important driver of network expansion, continues,
and we believe will continue, to grow at significant rates;
o Internet traffic is increasingly expected to include content such as
full motion video on demand (including high definition video)
multichannel high quality audio, online video conferencing, image
transfer, online gaming and other broadband applications, the delivery
of which will place greater demand on available bandwidth;
o North America and Europe have comprised the majority of optical
networking deployment, but we believe there could be significant
additional potential with the eventual development of other geographical
markets, including Latin America and Asia;
o While fiberoptic networks currently have sufficient capacity for long
haul, city-to-city, and undersea applications, new markets, including
intra-city metro and access, and, ultimately, fiber-to-the-premises
(FTTP) remain largely untapped. We believe these markets represent a
significant future opportunity for our industry and for us. Moreover, we
anticipate that installation of fiberoptic systems into these markets
will increase demand for long-haul capacity as overall network traffic
expands; and
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o We believe the availability and popularity of WiFi (Wireless Fidelity
Technology -- 802.11b) access has the potential to increase Internet
traffic while making access to the Internet portable and secure; 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.
While we continue to experience weakness in our telecommunications
business, during fiscal 2003 our Thin Film Products Group of businesses have
made significant contributions to our operating results.
We believe that the businesses reported under our Thin Film Products
segment will continue to grow in the future for several reasons:
o The display market, particularly rear-projection television sets and
plasma displays, are expected to increase:
o Security and authentication markets are expected to continue to grow to
address counterfeit concerns;
o Decorative markets are expected to grow as brand differentiation becomes
more important; and
o There has been increased interest and demand internationally for
bio-hazard detection and other security applications and we believe
believe that these markets have potential to increase in both the public
and private sectors.
However, due to the current economic uncertainty, vertical product
consolidations occurring in our Thin Film Products Group of businesses and other
factors, our net sales in our display business declined during our fourth
quarter and are expected to decline during the near term. Our ability to predict
our future revenue levels in these markets is extremely limited in the near term
and we are unable to predict the timing or extent of any potential growth in
such markets.
Recent Accounting Pronouncements
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 ("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.
During fiscal 2003, the Company recorded restructuring charges of $2.7 million
under SFAS 146 for lease costs associated with Phase 7 of its Global Realignment
Program. As we continue to restructure our business under the Global Realignment
Program, we expect to record additional restructuring charges under SFAS 146.
SFAS No. 148:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 expands the
disclosure requirements of SFAS No. 123 to require more
C-41
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002. The transition
provisions do not currently have an impact on our consolidated financial
position and results of operations as we have not elected to adopt the fair
value based method of accounting for stock-based employee compensation under
SFAS No. 123. The disclosure provisions of SFAS No. 148 are effective for
financial statements for interim periods beginning after December 15, 2002. We
adopted the disclosure requirements in the third quarter of fiscal 2003.
We account for our employee stock options under the intrinsic-value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," as interpreted by FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation." Under APB Opinion No.
25, when the exercise price of our employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The following table presents the effect on our net loss and net loss
per share if we had applied the fair value based method of accounting under SFAS
No. 123 (in millions, except per-share data):
Years Ended June 30,
--------------------------------------------
2003 2002 2001
--------- --------- ----------
Reported net loss $ (933.8) $(8,738.3) $(56,121.9)
Add back employee stock option expense measured
under APB 25 50.9 124.9 52.6
Less employee stock option expense measured
under SFAS 123 (685.2) (688.9) (566.2)
--------- --------- ----------
Pro forma net loss $(1,568.1) $(9,302.3) $(56,635.5)
========= ========= ==========
Reported net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40)
========= ========= ==========
Pro forma net loss per share -- basic and diluted $ (1.10) $ (6.92) $ (51.87)
========= ========= ==========
FASB Interpretation No. 45:
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which requires a guarantor to recognize
and measure certain types of guarantees at fair value. In addition,
Interpretation No. 45 requires the guarantor to make new disclosures for these
guarantees and other types of guarantees that are not subject to the initial
recognition and initial measurement provisions. The disclosure requirements were
effective for financial statements for interim or annual periods ended after
December 15, 2002, while the recognition and measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted the disclosure provisions of Interpretation No. 45
during the second quarter of fiscal 2003 and the initial recognition and initial
measurement provisions in the third quarter of fiscal 2003. The adoption of
Interpretation No. 45 did not have a material impact on the Company's financial
position or results of operations.
FASB Interpretation No. 46:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires an
investor with a majority of the variable interests (primary beneficiary) in a
variable interest entity to consolidate the assets, liabilities and results of
operations of the entity. A variable interest entity is an entity in which the
equity investors do not have a controlling interest or the equity investment at
risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. Interpretation No.
46 is applicable: (i) immediately for all variable interest entities created
after January 31, 2003; or (ii) in the first fiscal year or interim period
beginning after June 15, 2003 for those created before February 1, 2003. As of
June 30, 2003, the Company had one operating lease pertaining to two separate
properties, generally known as a "synthetic lease," which the Company purchased
subsequent to the end of fiscal
C-42
2003. Please refer to Note 7 and Note 21 of the Notes to Consolidated Financial
Statements under Item 8 of this Annual Report on Form 10-K for further
discussion of the operating lease and subsequent purchase of the property.
In addition, the Company is currently reviewing its cost and equity method
investments acquired prior to February 1, 2003 to determine whether those
entities are variable interest entities and, if so, if the Company is the
primary beneficiary of any of its investee companies. At June 30, 2003, the
Company had 23 cost and equity method investments primarily in privately held
companies and venture funds that have the potential to provide strategic
technologies and relationships to the Company's businesses. The Company expects
to complete the review during the first quarter of fiscal 2004. Provided the
Company is not the primary beneficiary, the Company's maximum exposure to loss
for these investments at June 30, 2003 is limited to the carrying amount of its
investment of $37.6 million in such entities and its minimum funding commitments
of $21.4 million. The consolidation of any investee companies under
Interpretation No. 46 could adversely affect the financial position and results
of operations of the Company.
Emerging Issues Task Force Issue No. 00-21:
In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF
00-21), "Revenue Arrangements with Multiple Deliverables," which provides
guidance on the timing and method of revenue recognition for arrangements that
include the delivery of more than one product or service. EITF 00-21 is
effective for arrangements entered into in periods beginning after June 15,
2003. The Company does not expect adoption to have a material impact on its
financial position or results of operations.
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. Estimates and judgments used in the preparation of our financial
statements are, by their nature, uncertain and unpredictable, and depend upon,
among other things, many factors outside of our control, such as demand for our
products and economic conditions. This uncertainty and unpredictability are
heightened during periods of economic uncertainty, such as the present.
Accordingly, our estimates and judgments may prove to be incorrect and actual
results may differ, perhaps significantly, from these estimates under different
estimates, 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 are 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.
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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, for example, as a result of 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 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. 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 full 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.
Goodwill Valuation:
We test goodwill for possible impairment on an annual basis and at any
other time if events occur or circumstances indicate that the carrying amount of
goodwill may not be recoverable. Circumstances that could trigger an impairment
test include but are not limited to: a significant adverse change in the
business climate or legal factors; an adverse action or assessment by a
regulator; unanticipated competition; loss of key personnel; the likelihood that
a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; results of testing for recoverability of a significant asset
group within a reporting unit; and recognition of a goodwill impairment loss in
the financial statements of a subsidiary that is a component of a reporting
unit.
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The determination as to whether a write down of goodwill is necessary
involves significant judgment based on the short-term and long-term projections
of the future performance of the reporting unit to which the goodwill is
attributed. The assumptions supporting the estimated future cash flows of the
reporting unit, including the discount rate used and estimated terminal value
reflect our best estimates.
Long-lived asset valuation (property, plant and equipment and intangible
assets):
Long-lived assets held and used
We test long-lived assets or asset groups for recoverability when events or
changes in circumstances indicate that their carrying amount may not be
recoverable. Circumstances which could trigger a review include, but are not
limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed significantly before the end of its estimated useful
life.
Recoverability is assessed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances. An
impairment loss is recognized when the carrying amount is not recoverable and
exceeds fair value.
Long-lived assets held for sale
We classify long-lived assets as held for sale when certain criteria are
met, which include: management commitment to a plan to sell the assets; the
availability of the assets for immediate sale in their present condition;
whether an active program to locate buyers and other actions to sell the assets
has been initiated; whether the sale of the assets is probable and their
transfer is expected to qualify for recognition as a completed sale within one
year; whether the assets are being marketed at reasonable prices in relation to
their fair value; and how unlikely it is that significant changes will be made
to the plan to sell the assets. Long-lived assets held for sale are included in
other current assets.
We measure long-lived assets to be disposed of by sale at the lower of
carrying amount or fair value less cost to sell. Fair value is determined using
quoted market prices or the anticipated cash flows discounted at a rate
commensurate with the risk involved.
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,
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 year 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. In 2003, all recoverable income taxes are recorded
as Refundable Income Taxes and we have recorded deferred tax assets only to the
extent of deferred tax liabilities.
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.
C-45
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:
During fiscal 2003, 2002 and 2001, we developed formalized plans for
restructuring our businesses and recorded significant charges in connection with
our Global Realignment Program. In connection with these plans, we have recorded
estimated expenses for severance and outplacement costs, lease cancellations,
asset write-offs and other restructuring costs. In accordance with SFAS 146,
costs associated with restructuring activities initiated after December 31, 2002
have been recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. 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, including evaluating real estate market conditions for expected vacancy
periods and sub-lease rents. 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,
-----------------------------------------------
2003 2002 2001
------------- ------------- ---------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 91.8 106.6 71.4
Gross profit (loss) 8.2 (6.6) 28.6
Operating expenses:
Research and development 22.7 23.2 10.1
Selling, general and administrative 39.5 34.8 25.3
Amortization of goodwill -- 85.4 153.0
Amortization of other intangibles 2.9 33.8 13.6
Acquired in-process research and development 0.1 2.3 12.2
Reduction of goodwill 33.5 397.1 1,537.4
Reduction of other long-lived assets 24.9 147.4 11.9
Restructuring charges 17.9 23.7 8.2
------ ------ --------
Total operating expenses 141.5 747.7 1,771.7
------ ------ --------
Loss from operations (133.3) (754.3) (1,743.1)
Interest and other income, net 4.8 4.4 1.5
Gain (loss) on sale of subsidiaries' assets (0.3) -- 54.8
Gain on sale of investments 0.6 1.4 (17.3)
Reduction in fair value of investments (6.7) (20.6) (16.2)
Loss on equity method investments (1.3) (5.0) (27.3)
------ ------ --------
Loss before income taxes (136.2) (774.1) (1,747.6)
Income tax expense (benefit) 2.0 21.6 (11.5)
------ ------ --------
Net loss (138.2)% (795.7)% (1,736.1)%
====== ====== ========
Net Sales:
Net sales of $675.9 million in fiscal 2003 represents a decrease of $422.3
million, or 38%, from net sales of $1,098.2 million in fiscal 2002. The decline
in net sales was due primarily to continued lower demand for our communications
products and lower average selling prices for these products. The downturn in
C-46
the telecommunications industry resulted in a decrease in network deployment and
capital spending by telecommunications carriers, which in turn caused our
customers to reduce their inventory levels, and hence, their need for our
products. In addition, we and our competitors are experiencing increasing price
pressure as we compete to supply the greatly reduced demand levels. The decline
in our communications revenue in 2003 was partially offset by the increase in
sales of our Thin Film Products Group, primarily in display and security markets
and the inclusion of sales from L.A. Label and OptronX as of their acquisition
dates of January 21, 2003 and September 18, 2002, respectively. As a result of
the downturn in the telecommunications industry, revenue from our Thin Film
Product Group has become increasingly significant to our total net sales,
accounting for 51% of our total net sales during fiscal 2003 as compared to 27%
and 13% in fiscal 2002 and 2001, respectively. We expect our Thin Film Products
Group revenue to continue to account for a significant portion of our total net
sales. Notwithstanding our overall increase in net sales in our Thin Film
Products Group during fiscal 2003, in recent periods, we have experienced
reduced demand for some of the Group's products, particularly our components
used in projectors and optically variable pigments used in currencies. Looking
ahead, we expect to experience both reduced revenue and operating income in this
Group, as the economic uncertainty continues.
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.
Net sales in fiscal 2003 and 2002 included approximately $32.3 million and
$44.9 million of contract cancellation payments, respectively. We generally
recognize such revenue when no future obligations exist and we have received
payments from our customers. Net sales in fiscal 2001 included no contract
cancellation revenue. We expect cancellation revenue to decline further or be
eliminated in future periods.
Net sales to customers outside North America accounted for $201.3 million,
$290.9 million and $1,043.4 million of total net sales, or 30%, 26% and 32%, for
the years ended June 30, 2003, 2002 and 2001, respectively.
During fiscal 2003, Texas Instruments (a customer of our Thin Film Products
Group) accounted for 12% of net sales and during the fourth quarter accounted
for less than 10% of net sales. 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") (all customers
of our Communications Product Group), accounted for 14%, 12% and 10% 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.
Looking forward, we expect to continue to experience no long-term
visibility and fluctuations, perhaps significant fluctuations, in our sales in
both our communications and non-communications businesses for the foreseeable
future. Many of our major customers continue to express uncertainty as to their
future requirements, as capital spending levels remain low and uncertain. In the
communications business, this uncertainty is reflected in the limited and highly
variable forecasts our customers are providing of their anticipated needs for
our communications products. We anticipate that we will continue to be
unprofitable in the near future periods. Currently, we are able to provide sales
guidance only for current periods, which is indicative or our extremely limited
visibility. Nevertheless, our strategy and operating plans are based on
assumptions about our future business, including our expected future sales.
Failure to achieve expected sales levels will materially impair our ability to
meet strategic and operating plan expectations.
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 in fiscal 2003 was 8% of total net sales, as compared to
negative 7% in fiscal 2002. Our gross margin improved in 2003 as compared to
2002 primarily as a result of the following: (i) $60.1 million of write-downs of
inventories in the current fiscal year, as compared to $203.9 million in the
prior year; (ii) $7.7 million of charges
C-47
other than restructuring associated with our Global Realignment Program in the
current fiscal year, primarily consisting of severance charges for manufacturing
employees, as compared to $124.6 million in the prior year; (iii) lower
depreciation in the current fiscal year due to the write-downs of property,
plant and equipment as a result of our quarterly impairment reviews and the
removal and disposal of property, plant and equipment under the Global
Realignment Program; (iv) a decrease in warranty expense of $36.3 million as
compared to the prior year as a result of lower revenues and resolution of
certain warranty obligations; (v) an increase in the proportion of revenue from
contract cancellation payments; and (vi) written down inventories representing a
larger proportion of cost of sales than the previous year. However, these
favorable developments in fiscal 2003 were partially offset by the following:
(i) $18.4 million of royalty expense primarily in connection with a new patent
license in fiscal 2003; (ii) our sales volumes and average selling prices in the
current year were below those from the prior-year; and (iii) a lower margin
product mix in the current fiscal year due to lower sales of high-margin
communications components.
Gross margin as a percentage of net sales was negative 7% in fiscal 2002
compared to 29% in fiscal 2001. 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 partially 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.
Our gross margin can generally be affected by a number of factors,
including, among others, product volumes, product mix, product demand, pricing
pressures, manufacturing constraints, inventory write-downs, consumption of
previously written-down inventories, warranty costs, product yield, stock-based
compensation expenses 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. Considering these factors, gross margin
fluctuations are difficult to predict and there can be no assurance that we will
surpass or maintain gross margin percentages at historical or projected levels
in future periods.
Looking ahead, as a general matter, we expect our gross margins to continue
to be pressured by declining average sales prices for our products and, to a
lesser extent, uncertainty related to our cost of goods sold as we continue to
restructure our manufacturing operations in accordance with the Global
Realignment Program. Prices have been and continue to decline for a number of
reasons, some of which are more particularly described in the "Risk Factors"
section of this Annual Report under the heading "Average selling prices are
declining." We are taking measures, under our Global Realignment Program and
other actions to reduce our cost of goods sold. However, price stability, which
we do not control, is critical to our ability to achieve and predict stable
gross margins.
Research and Development Expense:
Research and development ("R&D") expense was $153.7 million in fiscal 2003,
compared to $254.8 million in fiscal 2002 and $325.9 million in fiscal 2001.
The decrease in R&D spending in absolute dollar amount in fiscal 2003 as
compared to fiscal 2002 was primarily due to the cost savings resulting from our
Global Realignment Program, which included the elimination of certain product
development programs as well as workforce reductions. Personnel-related expenses
declined by approximately $28 million in fiscal 2003. In addition, the decline
in R&D expense was attributable to: (i) stock-based compensation expense of
$10.3 million compared to $31.3 million in fiscal 2002; (ii) charges other than
restructuring associated with our Global Realignment Program of $2.7 million,
compared to $8.2 million in fiscal 2002; and (iii) lower depreciation due to the
write-downs of property, plant and equipment as a result of our quarterly
impairment reviews and the removal and disposal of property, plant and equipment
under the Global Realignment Program.
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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.
We believe that investment in R&D is critical to attaining our strategic
objectives. Despite our continued efforts to reduce expenses under the Global
Realignment Program, there can be no assurance that our R&D expenses will
continue to decline in future quarters. In addition, there can be no assurance
that such expenditures will be successful or that improved processes or
commercial products, at acceptable volumes and pricing, will result from our
investment in R&D.
Selling, General and Administrative Expense:
Selling, general and administrative ("SG&A") expense was $267.3 million in
fiscal 2003, compared to $382.9 million in fiscal 2002 and $818.1 million in
fiscal 2001. The decrease in SG&A spending in absolute dollar amount in fiscal
2003 as compared to fiscal 2002 was primarily due to: (i) a decline in
personnel-related expenses of $36.4 million as a result of workforce reductions,
site closures and other cost cutting measures implemented under our Global
Realignment Program; (ii) stock-based compensation expense of $23.4 million,
compared to $52.5 million in fiscal 2002 (iii) lower depreciation due to the
write-downs of property, plant and equipment as a result of our quarterly
impairment reviews and the removal and disposal of property, plant and equipment
under the Global Realignment Program; and (iv) net recovery of $3.4 million of
uncollectible accounts due to settlement agreements with certain customers and
lower bad debt expenses as a result of lower revenue and improved collections.
As a percentage of total net sales, the increase in SG&A expense was due to our
total net sales declining more rapidly than our SG&A spending.
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.
Despite our continued efforts to reduce expenses under the Global
Realignment Program, we continue to incur comparatively high levels of SG&A
expense as a percentage of our net sales. Our high SG&A levels are, to a major
extent, a legacy of our historic level of operations. In March, 2001, we
employed approximately 29,000 persons at 41 sites (excluding sales offices). As
of June 30, 2003, we employed 5,489 persons, at 12 sites (excluding sales
offices). As we have reduced the number of our locations, we have made
significant progress in reducing our SG&A expense. However, additional effort
remains to align our SG&A levels to our current and expected operations, which
alignment will be crucial to our recovery and we may not be successful in this
effort. Also, we expect to incur additional SG&A expenses as we implement the
requirements of the Sarbanes-Oxley Act of 2002, in particular, Section 404
thereof, which requires management to report on, and our independent auditors to
attest to, our internal controls. There can be no assurance that our SG&A
expense will continue to decline in the future or that, more importantly, we
will develop a cost structure (including our SG&A expense) which will lead to
profitability under current and expected revenue levels.
Amortization of Goodwill:
No amortization of goodwill was recorded during fiscal 2003, as compared to
$937.5 million and $4,945.9 million during fiscal 2002 and 2001, respectively.
On July 1, 2002, we adopted SFAS No. 142, under which goodwill is no longer
amortized but is reviewed for impairment annually, or more frequently if certain
events or
C-49
changes in circumstances indicate that the carrying value may not be
recoverable. Please refer to the "Reduction of Goodwill" section below for
further discussion of the impairment review on goodwill.
Amortization of Purchased Intangibles:
In fiscal 2003, amortization of purchased intangibles was $19.8 million,
compared to $371.2 million in fiscal 2002 and $441.1 million in fiscal 2001. The
decrease in amortization was primarily due to the write-downs of the carrying
amount of the purchased intangibles as a result of impairment charges recorded.
Please refer to the "Reduction of Other Long-Lived Assets" section below for
further discussion of the impairment charges related to our purchased
intangibles.
Acquired In-process Research and Development:
In fiscal 2003, we recorded charges of $0.4 million for acquired in-process
research and development ("IPR&D") in connection with our acquisition of
OptronX. In fiscal 2002, we recorded charges of $25.3 million 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). 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 2003 acquisitions, as well as
the current status of the acquired IPR&D projects for each acquisition prior to
fiscal 2003 can be found at the end of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Reduction of Goodwill:
During fiscal 2003, we recorded $225.7 million of impairment charges in
accordance with SFAS No. 142. During fiscal 2002 and fiscal 2001, we recorded
$4,360.8 million and $49,699.5 million, respectively, of impairment charges in
accordance with SFAS No. 121.
Fiscal 2003 Charges:
On July 1, 2002, we adopted SFAS No. 142, under which goodwill is reviewed
for impairment annually, or more frequently if certain events or changes in
circumstances indicate that the carrying value may not be recoverable. In
addition, we were required to perform a transitional impairment review related
to the carrying value of goodwill as of July 1, 2002. During the first quarter
of fiscal 2003, we completed the transitional impairment review related to the
carrying value of goodwill as of July 1, 2002 and determined that there was no
impairment beyond amounts previously recorded as of that date.
As part of our quarterly review of financial results in the first quarter
of fiscal 2003, we noted indicators that the carrying value of our goodwill may
not be recoverable and performed an additional impairment review. The impairment
review was performed because of the prolonged economic downturn affecting our
operations and revenue forecasts. As we determined that the continued decline in
market conditions within our industry was significant and prolonged, we
evaluated the recoverability of our goodwill in accordance with SFAS No. 142
during the first quarter of fiscal 2003. We did not identify any impairment
indicators during the rest of fiscal 2003.
Under the first step of the interim SFAS No. 142 analysis, performed during
the first quarter of fiscal 2003, the fair value of the reporting units was
determined based on a combination of the income approach, which estimates the
fair value based on the future discounted cash flows, and the market approach,
which estimates the fair value based on comparable market prices. Under the
income approach, we assumed a cash flow period of 5 years, long-term annual
growth rates of 9% to 33%, a discount rate of 12.5% and terminal value growth
rates of 5% to 7%. Based on the first step analysis, we determined that the
carrying amount of three reporting units within the
C-50
Communications Products Group was in excess of their fair value. As such, we
were required to perform the second step analysis on the three reporting units
that failed the first step test to determine the amount of the impairment loss.
As of the filing of the Quarterly Report on Form 10-Q for the first quarter of
fiscal 2003, we had not completed the second step analysis due to the
complexities involved in determining the implied fair value of the goodwill of
each reporting unit. However, we determined that an impairment loss was probable
and could be reasonably estimated. Therefore, as permitted by SFAS No. 142, we
recorded an estimated impairment charge of $224.4 million to reduce the carrying
value of our goodwill in the first quarter of fiscal 2003.
During the second quarter of fiscal 2003, we completed the second step
analysis in connection with the impairment review for the first quarter of
fiscal 2003 and recorded an additional impairment charge of $1.3 million, as the
actual impairment charge was determined to be higher than the estimated charge
recorded in the first quarter of fiscal 2003.
During the fourth quarter of fiscal 2003, we were required to perform an
annual impairment review related to the carrying value of goodwill as of June
30, 2003. We completed the annual impairment review related to the carrying
value of goodwill as of June 30, 2003 and determined that there was no
impairment beyond amounts previously recorded as of that date.
The following table summarizes the impairment charges recorded during
fiscal 2003 (in millions):
Reporting Units
Communications Products Group:
Active Components $ 54.6
Optical Layer 28.7
Transmission 142.4
------
Total $225.7
======
Fiscal 2002 Charges:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002, we restructured our businesses and realigned our operations to
focus on certain 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
determined to be $0, and recorded total charges of $31.2 million related to
goodwill.
As part of our quarterly reviews of financial results, we noted indicators
in the second, third and fourth quarters of fiscal 2002 that the carrying value
of our goodwill may not be recoverable and performed an impairment review. The
impairment review was performed pursuant to SFAS No. 121 because of the
prolonged economic downturn affecting our operations and revenue forecasts. As a
result of the prolonged economic downturn, our projected future revenue and cash
flows for certain of our asset groupings were revised downward in the second,
third and fourth quarters of fiscal 2002. Therefore, we recorded charges to
reduce goodwill 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.
The following table summarizes the write-downs of goodwill for the second
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
OCLI $ 514.1 5%-60%
SDL 751.0 15%-60%
--------
Total $1,265.1
========
We assumed a cash flow period of 5 years, a discount rate of 14%, and
terminal growth rates of 5% to 7%. The long-term annual growth rates are higher
in the early years of the 5-year cash flow period, representing our estimated
growth in the period of industry recovery, and a reduced growth rate in the
later years.
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The following table summarizes the write-downs of goodwill for the third
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
E-TEK $ 697.5 30%-35%
JDS FITEL 1,184.7 30%-42%
OCLI 20.3 4%-13%
SDL 762.5 27%-50%
Other 206.5 7%-45%
--------
Total $2,871.5
========
We assumed a cash flow period of 5 years, a discount rate of 14%, and
terminal growth rates of 5% to 7%. The long-term annual growth rates are higher
in the early years of the 5-year cash flow period, representing our estimated
growth in the period of industry recovery, which decreases in the later years.
The following table summarizes the write-downs of goodwill for the fourth
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
Epitaxx $130.8 25%-40%
SDL 43.5 15%-50%
UNL 18.7 25%-50%
------
Total $193.0
======
We assumed a cash flow period of 5 years, a discount rate of 14%, and
terminal growth rates of 7%. The long-term annual growth rates are higher in the
early years of the 5-year cash flow period, representing our estimated growth in
the period of industry recovery, which decreases in the later years.
Fiscal 2001 Charges:
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 been valued in previous acquisitions. In
accordance with SFAS No. 121, we wrote down the related intangible assets to
their fair value, which was determined to be $0, and recorded total charges of
$3,075.4 million related to goodwill.
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.
The following table summarizes the write-downs of goodwill for the third
quarter of fiscal 2001 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ---------------
ETEK $ 7,669.6 15%-40%
SDL 29,214.4 15%-40%
EPD 2,397.3 15%-40%
Other 495.9 15%-40%
---------
Total $39,777.2
=========
We assumed a cash flow period of 5 years, a discount rate of 13%, and
terminal growth rate of 7%. The long-term annual growth rates are higher in the
early years of the 5-year cash flow period, representing our estimated growth in
the period of industry recovery, and a reduced growth rate in the later years.
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The following table summarizes the write-downs of goodwill for the fourth
quarter of fiscal 2001 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
E-TEK $3,353.9 15%-60%
OCLI 1,012.7 15%-60%
SDL 2,480.3 15%-60%
--------
Total $6,846.9
========
We assumed a cash flow period of 5 years, a discount rate of 14.5%, and
terminal growth rate of 7%. The long-term annual growth rates are higher in the
early years of the 5-year cash flow period, representing our estimated growth in
the period of industry recovery, which decreases in the later years.
Reduction of Other Long-Lived Assets
During fiscal 2003, we recorded $167.9 million of reductions in the
carrying value of our long-lived assets in accordance with SFAS No. 144. During
fiscal 2002 and fiscal 2001, we recorded $1,618.6 million and $385.5 million,
respectively, of reductions in the carrying value of our long-lived assets in
accordance with SFAS No. 121. These charges excluded asset write-downs
associated with the Global Realignment Program. The following table summarizes
the components of the reductions of other long-lived assets (in millions):
Years Ended June 30,
------------------------------------
2003 2002 2001
------ -------- ------
Assets held and used:
Purchased intangibles (other than goodwill) $ 68.6 $1,243.1 $375.3
Property, plant and equipment 79.1 375.5 10.2
Assets held for sale:
Property, plant and equipment 20.2 -- --
------ -------- ------
Total reductions of other long-lived assets $167.9 $1,618.6 $385.5
====== ======== ======
Fiscal 2003 Charges:
Assets Held and Used:
On July 1, 2002, we adopted SFAS No. 144, under which long-lived assets
other than goodwill are tested for recoverability if certain events or changes
in circumstances indicate that the carrying value may not be recoverable. We
noted indicators during the first quarter of fiscal 2003 that the carrying value
of our long-lived assets, including purchased intangibles recorded in connection
with its various acquisitions and property, plant and equipment, may not be
recoverable and performed an impairment review. The impairment review was
performed pursuant to SFAS No. 144 because of the prolonged economic downturn
affecting our operations and revenue forecasts. As a result of the prolonged
economic downturn, our projected future revenue and cash flows for certain of
our asset groupings were revised downward in the first quarter of fiscal 2003.
Therefore, we evaluated the recoverability of long-lived assets and recorded
impairment charges based on the amounts by which the carrying amounts of these
assets exceeded their fair value. For purchased intangibles, fair value was
determined based on discounted future cash flows for the operating entities that
had separately identifiable cash flows. For tangible fixed assets, we valued
these assets that were subject to impairment using specific appraisals.
The following table summarizes the write-downs of purchased intangibles and
property, plant and equipment by acquisition for the first quarter of fiscal
2003 (in millions):
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Purchased Property, Plant and
Acquired Entities Intangibles Equipment
- ----------------- ----------- -------------------
Datacom $39.1 $15.6
Epitaxx 19.9 26.3
SDL -- 24.3
Scion 8.9 12.9
Other 0.7 --
----- -----
Total $68.6 $79.1
===== =====
During the rest of fiscal 2003, we noted no impairment indicators in
connection with our long-lived assets held and used, and accordingly, a test of
recoverability of our long-lived assets was not required.
Assets Held for Sale:
During the third quarter and fourth quarter of fiscal 2003, we classified
certain property, plant and equipment intended to be disposed of within a twelve
month period as assets held for sale. In accordance with SFAS No. 144, we
recorded an impairment charge of $13.3 million, representing the amount by which
their carrying value exceeds fair value less cost to sell. During the first
quarter of fiscal 2003, we classified certain property and equipment as assets
held for sale in connection with the sales of our SIFAM and Cronos subsidiaries
and recorded total impairment charges of $6.9 million.
Fiscal 2002 Charges:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002, we restructured our businesses and realigned our operations to
focus on certain 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 $0, and recorded total charges of $10.8 million related to purchased
intangibles other than goodwill.
As part of our quarterly reviews of financial results, we noted indicators
in the second, third and fourth quarters of fiscal 2002 that the carrying value
of our long-lived assets, including significant amounts of purchased intangibles
recorded in connection with its various acquisitions, may not be recoverable and
performed an impairment review. The impairment review was performed pursuant to
SFAS No. 121 because of the prolonged economic downturn affecting our operations
and revenue forecasts. As a result of the prolonged economic downturn, our
projected future revenue and cash flows for certain of our asset groupings were
revised downward in the second, third and fourth quarters of fiscal 2002.
Therefore, we recorded charges to reduce our 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.
The following table summarizes the write-downs of our long-lived assets,
consisting of purchased intangibles, for the second quarter of fiscal 2002 (in
millions):
Purchased Long-Term Annual
Acquired Entity Intangibles Growth Rate
- --------------- ----------- ---------------
SDL $2.5 15%-60%
We assumed a cash flow period of 5 years, a discount rate of 14%, and
terminal growth rates of 5% to 7%. The long-term annual growth rates are higher
in the early years of the 5-year cash flow period, representing our estimated
growth in the period of industry recovery, and a reduced growth rate in the
later years.
The following table summarizes the write-downs of our long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
third quarter of fiscal 2002 (in millions):
C-54
Purchased Property, Plant and Long-Term Annual
Acquired Entities Intangibles Equipment Growth Rate
- ----------------- ----------- ------------------- ----------------
E-TEK $224.1 $ 1.1 30%-35%
JDS FITEL 233.9 -- 30%-42%
OCLI 210.7 67.2 4%-13%
SDL 247.6 10.4 27%-50%
Other 19.0 8.6 7%-45%
------ -----
Total $925.3 $87.3
====== =====
We assumed a cash flow period of 5 years, a discount rate of 14%, and
terminal growth rates of 5% to 7%. The long-term annual growth rates are higher
in the early years of the 5-year cash flow period, representing our estimated
growth in the period of industry recovery, and a reduced growth rate in the
later years.
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
fourth quarter of fiscal 2002 (in millions):
Purchased Property, Plant and Long-Term Annual
Acquired Entities Intangibles Equipment Growth Rate
- ----------------- ----------- ------------------- ----------------
E-TEK $ -- $ 63.2 22%-45%
JDS FITEL 132.5 90.7 17%
SDL 165.2 61.7 15%-50%
Other 6.8 72.6 7%-50%
------ ------
Total $304.5 $288.2
====== ======
We assumed a cash flow period of 1-5 years, a discount rate of 14%, and
terminal growth rate of 7%. The long-term annual growth rates are higher in the
early years of the 5-year cash flow period, representing our estimated growth in
the period of industry recovery, and a reduced growth rate in the later years.
Fiscal 2001 Charges:
As a result of the Phase 1 restructuring activities in the first quarter of
fiscal 2001, we restructured our businesses and realigned our operations to
focus on certain 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
determined to be $0, and recorded total charges of $298.1 million related to
purchased intangibles other than goodwill.
As part of our quarterly reviews of financial results, we noted indicators
in the third and fourth quarters of fiscal 2001 that the carrying value of our
long-lived assets, including significant amounts of purchased intangibles
recorded in connection with our various acquisitions, may not be recoverable and
performed an impairment review. The impairment review was performed pursuant to
SFAS No. 121 because of the prolonged economic downturn affecting our operations
and revenue forecasts. As a result of the prolonged economic downturn, projected
future revenue and cash flows for certain of our asset groupings were revised
downward in the fourth quarter of fiscal 2001. Therefore, we recorded charges to
reduce our 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.
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
fourth quarter of fiscal 2001 (in millions):
Purchased Property, Plant and Long-Term Annual
Acquired Entities Intangibles Equipment Growth Rate
- ----------------- ----------- ------------------- ----------------
OCLI $77.2 $ 8.6 15%-60%
SDL -- 1.6 15%-60%
----- -----
Total $77.2 $10.2
===== =====
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We assumed a cash flow period of 5 years, a discount rate of 14.5%, and
terminal growth rate of 7%. The long-term annual growth rates are higher in the
early years of the 5-year cash flow period, representing our estimated growth in
the period of industry recovery, and a reduced growth rate in the later years.
Global Realignment Program Charges (Restructuring and Other Charges):
In April 2001, we initiated the Global Realignment Program, under which we
began restructuring our business in response to the economic downturn. Since
inception, we have implemented 7 phases of restructuring activities and recorded
total restructuring charges of $645.6 million (of which $121.3 million, $260.0
million and $264.3 million were recorded in fiscal 2003, 2002 and 2001,
respectively). In addition, we incurred charges other than restructuring of
$474.9 million related to the Global Realignment Program (of which $55.7
million, $182.7 million and $236.5 million were recorded in fiscal 2003, 2002
and 2001, respectively). Please refer to "Note 13. Global Realignment Program
Charges" of our Notes to Consolidated Financial Statements for a detailed
discussion on these charges associated with our 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 and buildings
closed or scheduled for closure is 29. Based on the decisions made through the
end of fiscal 2003, we expect to reduce our total workforce by approximately
19,630 employees upon the completion of the Global Realignment Program. As of
June 30, 2003, 19,347 employees have been terminated.
In response to the continued business slowdown, we are planning further
restructuring activities under the Global Realignment Program, including
primarily further reductions of employment and additional site closures. The
majority of the actions and announcements under the Global Realignment Program
are expected to be completed by the end of December 2003. Since its inception,
we have reduced our annual expenses to date by approximately $1.2 billion. We
expect that, when completed, the Global Realignment Program will generate a
total annual cost reduction rate of approximately $1.3 billion. We estimate that
the total cost of the Global Realignment Program will be approximately $1.2
billion, of which $1.1 billion was recorded through the end of fiscal 2003.
The Global Realignment Program represents our concerted efforts to respond
to economic uncertainty 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.
Interest and Other Income, Net:
Net interest and other income was $32.5 million in fiscal 2003, compared to
$48.3 million in fiscal 2002 and $48.5 million in fiscal 2001. The decrease in
fiscal 2003 and 2002 from the prior-year was primarily attributable to the
decline in interest income as a result of lower average daily cash and
investment balances and lower interest rates. 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.
Gain (loss) on Sale of Subsidiaries' Net Assets:
In fiscal 2003, we completed the sale of all or significantly all of the
assets of three of our subsidiaries located in Billerica, Massachusetts,
Raleigh, North Carolina and Torquay, United Kingdom, and recognized a net loss
of $2.2 million from the transactions.
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.
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Gain (Loss) on Sale of Investments:
In fiscal 2003 and 2002, we recognized total gains of $4.0 million and
$15.0 million, respectively, 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 2003, we recorded $45.4 million of other-than-temporary
reductions in fair value of our available-for-sale and non-marketable
investments, compared to $225.8 million and $522.1 million in fiscal 2002 and
2001, respectively. 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 2003 consisted of $25.0 million related to the decline in fair value of
our investment in Adept and $20.4 million related to other non-marketable equity
securities. 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:
We recorded $8.5 million of charges in fiscal 2003, as compared to $54.6
million and $883.9 million in fiscal 2002 and 2001, respectively. Charges in
fiscal 2003 consisted of our pro rata share of the net losses on our equity
method investments. Charges in the prior-year periods included: (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 a provision for income tax expense of $13.5 million and $237.3
million for fiscal year 2003 and 2002, respectively, and an income tax benefit
of $371.9 for the fiscal year 2001. The expected tax benefit derived by applying
the federal statutory rate to the operating loss for fiscal 2003 differed from
the income tax expense recorded primarily due to non-deductible
acquisition-related charges and increases to the valuation allowance for
deferred tax assets.
Included in the $13.5 million provision for income taxes recorded for
fiscal year 2003 is an $18.0 million expense related to the prior financial
reporting period ended June 30, 2002 and resulted from an increase in our
valuation allowance for deferred tax assets. During the fiscal year ended 2003,
Canadian tax authorities completed a review of our pending claims for refunds of
prior-year income taxes. As a result of this review, certain matters related to
carryback periods and minimum taxes were identified that caused us to conclude
that we had recorded $18.0 million of net deferred tax assets in excess of
income taxes actually recoverable from prior years and, therefore, necessitated
the recording of an additional valuation allowance for deferred tax assets. As
of June 30, 2002, management concluded that due to the existing economic
environment, we should not record net deferred
C-57
tax assets in excess of recoverable income taxes. The $18.0 million amount
recorded in fiscal year 2003 was not material to the period in which it should
have been recorded nor material to the consolidated results of operations for
the year ending June 30, 2003. The impact on the net loss for the year ended
June 30, 2002 would have been an increase of $18.0 million, and the basic and
diluted net loss per share would have increased by $0.01 and we would have
restated the consolidated balance sheet as of June 30, 2002 by reducing the net
deferred income tax asset by $18.0 million. Net loss for the year ended June 30,
2003 would have decreased by $18.0 million, and the basic and diluted net loss
per share would have decreased by $0.01.
During fiscal 2003, we recorded a $7 million reduction to income tax
expense as a result of appreciation in the carrying value of available-for-sale
investments that reduced by $7 million the amount of valuation allowance for
deferred tax assets recorded in connection with the loss from continuing
operations. Fluctuations in the value of our available for sale investments may
create volatility in the income tax provision (benefit) in future quarters.
The expected tax benefit derived by applying the federal statutory rate to
the operating loss for fiscal 2002 and 2001 differed from the income tax expense
recorded primarily due to non-deductible acquisition-related charges, increases
to the valuation allowance for deferred tax assets and reductions in the
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.
At June 30, 2003, the valuation allowance for deferred tax assets was
$2,489.5 million. Approximately $55.4 million of the valuation allowance for the
deferred tax assets was attributable to acquisition-related items that if and
when realized in future periods, will first reduce goodwill, then other
non-current intangible assets of acquired subsidiaries, and then income tax
expense. Approximately $476.2 million of the valuation allowance as of June 30,
2003 was attributable to stock option deductions, the benefit of which will be
credited to paid-in capital when and if realized.
During fiscal year 2003, we received $75.1 million of net tax refunds
primarily attributable to the carry-back of Canadian tax net operating losses.
During fiscal 2003, we settled certain foreign tax examinations relating to
pre-acquisition periods of acquired subsidiaries. Approximately $5.5 million was
recorded as an increase to goodwill in connection with the settlements. We are
currently subject to various federal, state and foreign audits by taxing
authorities. We believe that adequate amounts have been provided for any
adjustments that may result from these examinations.
Operating Segment Information:
Communications Products Group. Net sales of $333.0 million in fiscal 2003
decreased as compared to net sales of $797.9 million in fiscal 2002. The decline
in our sales was primarily due to lower demand for our communications products
and lower average selling prices caused by the dramatic downturn in our
industry, which resulted in a decrease in network deployment and capital
spending by telecommunications carriers. This in turn caused our customers to
reduce their inventory levels. Operating loss as a percentage of net sales was
69% in fiscal 2003, as compared to an operating loss of 89% in fiscal 2002. In
fiscal 2001, operating income as a percentage of net sales was 13%.
Thin Film Products Group. Net sales of $342.8 million in fiscal 2003
represented an increase of $49.3 million, or 17%, from fiscal 2002. The increase
in our sales was primarily attributable to higher demand for our thin film
products for display and security markets. Operating income as a percentage of
net sales was 15% during the current fiscal year, as compared to an operating
loss of 0.1% during fiscal 2002. Net sales of $293.5 million in fiscal 2002, a
decrease of $127.3 million, or 30%, from fiscal 2001 was primarily due to lower
demand for our commercial laser products and thin film products for
telecommunications markets as a result of the industry downturn. Operating loss
as a percentage of net sales was 0.1% in fiscal 2002, as compared to an
operating income of 38% 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.
Notwithstanding our overall increase in net sales in our Thin Film Products
Group during fiscal 2003, in the fourth quarter of fiscal 2003, we experienced
reduced demand for some of the Group's products, particularly our
C-58
light engines used in projectors and optically variable pigments used in
currencies. Looking ahead, we expect to experience both reduced revenue and
operating income in the Group, as the economic uncertainty continues.
Liquidity and Capital Resources
We had a combined balance of cash, cash equivalents and short-term
investments of $1,234.1 million at June 30, 2003. Our total debt outstanding,
including capital lease obligations, was $8.2 million at June 30, 2003.
Operating activities used $220.0 million in cash during fiscal 2003,
primarily resulting from: (i) our net loss adjusted for depreciation and
amortization, stock-based compensation expense, reductions of goodwill and other
long-lived assets, non-cash charges associated with our Global Realignment
Program, and gains and losses on our investments; and (ii) a decrease in accrued
payroll and related expenses, offset by a decrease in accounts receivable,
inventories, deferred income taxes and other current assets. Our operating cash
flows were favorably affected by approximately $75.1 million in net tax refunds
received in fiscal 2003.
Accounts receivable were lower in fiscal 2003 primarily due to a decline in
sales. Days sales outstanding in accounts receivable was 55 days both at June
30, 2003, and June 30, 2002. Inventory levels were lower at June 30, 2003
primarily due to lower production volumes coupled with the write-downs of excess
and obsolete inventories.
Net deferred income taxes decreased in fiscal 2003 due to the reclass of
$39 million to income taxes receivable and the increase of $18 million in the
valuation allowance for deferred tax assets recorded in prior periods due to the
disallowance of certain carry-back claims by the Canadian government.
Cash provided by investing activities was $33.7 million in fiscal 2003,
primarily resulting from the following: (i) $85.3 million provided by the sale
of available-for-sale and other investments, net of purchases; and (ii) $28.4
million from the sale of property, plant and equipment, offset by acquisitions
including L.A. Label and OptronX as well as additional capital expenditures. We
expect to incur capital spending of between $90.0 million to $120.0 million in
fiscal 2004, compared to $47.2 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 $20.6 million in fiscal 2003. We
generated $21.4 million from the exercise of stock options and the sale of
common stock through our employee stock purchase plans, offset by the repayment
of $0.8 million in debt.
Financial Commitments:
Our investment portfolio includes minority investments in certain
privately-held companies. As of June 30, 2003, we had a commitment to provide
additional funding of up to a maximum of $21.4 million to certain venture
capital investment partnerships.
Lease Commitments:
As of June 30, 2003, 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. This arrangement
is a variable interest entity as defined under FASB Interpretation No. 46 and we
are the primary beneficiary. 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, 2003, $42.3 million has been
drawn and no further withdrawal is permitted as the funding period has expired
in accordance with the lease agreement. 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
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the Lessor for $44.7 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 pay up
to approximately $37.5 million of any shortfall.
On an annual basis or when indicators of impairment exist, we are required
to evaluate the expected fair value of the properties at the end of the lease
term. In the event we determine that it is probable and estimable that the
expected fair value of the properties at the end of the lease term will be less
than the Termination Value, we accrue for the estimated loss. We recorded the
following amounts in connection with the estimated loss on the properties (in
millions):
Years Ended June 30,
-----------------------------
2003 2002 2001
----- ----- -----
Raleigh, North Carolina properties $ 3.7 $11.8 $ --
Melbourne, Florida properties 6.9 -- --
----- ----- ----
Total $10.6 $11.8 $ --
===== ===== ====
Raleigh, North Carolina Properties:
In connection with its Phase 2 restructuring activities, we announced our
plan to vacate buildings located in the Raleigh, North Carolina site. During
fiscal 2002, we noted indicators of impairment and accrued losses of $11.8
million, representing the difference between the expected fair value of the
properties at the end of the lease term and their carrying value. During fiscal
2003, we accrued additional losses of $3.7 million. We recorded these charges
under "Restructuring charges" in the Consolidated Statements of Operations.
Melbourne, Florida Properties:
During fiscal 2003, we noted indicators of impairment and accrued losses of
$6.9 million and recorded such amounts as deferred assets, which are being
amortized on a straight-line basis through the end of the lease term. As of June
30, 2003, $2.3 million was included under "Other current assets" and $2.7
million was included under "Other assets" in the Consolidated Balance Sheet.
Amortization expense totaled $1.9 million during fiscal 2003 and was recorded
under "Selling, general and administrative expense" in the Consolidated
Statement of Operations.
Neither the real estate assets nor the debt associated with the development
of the projects was included on our Consolidated Balance Sheet as of June 30,
2003. Beginning in the first quarter of fiscal 2004, we will be required to
consolidate the real estate assets and liabilities associated with the operating
lease in accordance with Interpretation No. 46 and the impact on our financial
position and results of operations will be as follows:
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Consolidated Balance Sheet:
Accounts Explanation of Impact
- -------- ---------------------
Other current assets Decrease by $2.3 million due to the recognition of deferred impairment charges
related to the Melbourne, Florida properties.
Property, plant and (i) Increase by $41.9 million for the net book value of the properties in
equipment, net both locations;
(ii) Decrease by the $15.5 million accrued loss recorded in connection with the
Raleigh, North Carolina properties; and
(iii) Decrease by the $6.9 million accrued loss recorded in connection with the
Melbourne, Florida properties.
Other assets Decrease by $2.7 million due to the recognition of deferred impairment charges
related to the Melbourne, Florida properties.
Restructuring accrual (i) Decrease by the $15.5 million accrued loss associated with the Raleigh,
North Carolina properties; and
(ii) Decrease by $0.1 million due to the reversal of accrued lease charges
associated with the Raleigh, North Carolina properties.
Other non-current liabilities (i) Increase by $44.7 million related to our debt obligations associated with
the properties in both locations.
(ii) Decrease by the $6.9 million accrued loss associated with the Melbourne,
Florida properties.
Accumulated deficit (i) Increase by $5.0 million for the decrease in the fair value of the Melbourne,
Florida properties; and
(ii) Increase by $2.6 million due to the difference between the assets and
liabilities added to the balance sheet, which is offset by the reversal of
accrued lease charges associated with the Raleigh, North Carolina properties.
Consolidated Statement of Operations:
Accounts Explanation of Impact
- -------- ---------------------
Reduction of long-lived assets Increase by $5.0 million for the decrease in the fair value of the Melbourne,
Florida properties.
Cumulative effect of a change Increase by $2.6 million due to the difference between the assets and liabilities
in accounting principle added to the balance sheet, which is offset by the reversal of accrued lease
charges associated with the Raleigh, North Carolina properties.
As of June 30, 2003, we restricted $47.7 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.
Subsequent to the end of fiscal 2003, we purchased the properties discussed
above for approximately $44.7 million in cash. The transaction closed on
September 16, 2003 (See Note 21 of the Notes to Consolidated Financial
Statements).
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As of June 30, 2003, we had three standby letter of credit facilities
totaling $7.9 million. In addition, we had an operating bank line of credit of
$5.0 million. Advances under the line of credit bear interest at the U.S. prime
rate. As of June 30, 2003, the interest rate was 4.00% and we had no outstanding
borrowings under the line of credit.
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, 2003, and the effect these obligations are expected to
have on our liquidity and cash flow in future periods (in millions):
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 Thereafter Total
------- ------- ------- ------- ------- ---------- ------
Debt obligations $ 2.2 $ 0.1 $ 0.4 $ -- $ -- $ -- $ 2.7
Capital lease obligations, including
interest expense 0.8 0.8 0.8 0.9 0.9 2.3 6.5
Non-marketable investments 21.4 -- -- -- -- -- 21.4
Royalty obligations 1.5 3.0 4.3 4.5 2.3 -- 15.6
Operating lease obligations 31.5 30.8 29.5 25.7 19.3 75.7 212.5
Losses on purchase commitments 8.7 -- -- -- -- -- 8.7
----- ----- ----- ----- ----- ----- ------
Total $66.1 $34.7 $35.0 $31.1 $22.5 $78.0 $267.4
===== ===== ===== ===== ===== ===== ======
As of June 30, 2003, operating lease obligations of $112.1 million in
connection with our Global Realignment Program and losses on purchase
commitments of $8.7 million were accrued in our Consolidated Balance Sheet.
We expect to use approximately $100.0 to $125.0 million in cash in fiscal
2004, exclusive of amounts required relating to our acquisition and investment
activities during the fiscal year and including expected net tax refunds to be
received and cash payments under the Global Realignment Program. 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. Moreover, due to the continued industry slowdown and the
implementation of our Global Realignment Program, we have in recent periods
consumed, and we expect to continue to consume, portions of our cash reserves to
fund our operations. The amounts consumed to date, together with the amounts
currently anticipated to be spent, are not expected to materially impair our
financial condition. However, if the current economic uncertainty remains
protracted, we may need to expend additional, currently unanticipated, 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.
Employee Stock Options
Stock Option Program Description:
Our stock option program is a broad-based, long-term retention program that
is intended to attract and retain employees and align stockholder and employee
interests. As of June 30, 2003, we have available for issuance 83.4 million
shares of common stock underlying options for grant primarily under the Amended
and Restated 1993 Flexible Stock Incentive Plan and the 1996 Non-Qualified Stock
Option Plan. The exercise price is generally equal to the 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.
Substantially all of our employees participate in our stock option program.
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Distribution and Dilutive Effect of Stock Options:
The following table presents certain information regarding stock options
granted to employees, including officers:
FY 2003 FY 2002 FY 2001
------- ------- -------
Grants(1) to employees, including officers, as % of
outstanding shares 1.8% 3.4% 3.5%
Grants to Senior Executive Officers(2) as % of total
options granted 12.8 6.6 1.3
Grants to Senior Executive Officers as % of outstanding shares 0.2 0.2 0.1
Outstanding options held by Senior Executive Officers as % of
total outstanding options 12.3 11.4 8.4
- ------------
(1) Grants exclude options assumed in connection with acquisitions.
(2) Senior Executive Officers include Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer.
General Stock Option Information:
The following table presents our option activities through the end of
fiscal 2003 (in thousands, except weighted-average exercise price):
Options Outstanding
----------------------------
Options Weighted-
Available for Number of Average
Grant Options Exercise Price
------------- --------- --------------
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
------- -------
June 30, 2002 67,606 152,574 26.11
Increase in authorized shares 7,226 -- --
Granted (26,108) 26,108 2.63
Canceled 26,033 (30,374) 21.91
Exercised -- (4,081) 1.39
Expired 8,688 (23,603) 35.34
------- -------
June 30, 2003 83,445 120,264 21.12
======= ======
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The following table summarizes certain information regarding outstanding
options as of June 30, 2003 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Remaining
Number Contractual Life Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
(150% Increments) ----------- ---------------- ---------------- ----------- ----------------
$0.00-0.03 373 0.8 $ 0.00 372 $ 0.00
0.04-0.04 119 5.5 0.04 118 0.04
0.24-0.35 109 1.2 0.32 109 0.32
0.39-0.39 6 1.3 0.39 6 0.39
0.60-0.86 2,016 3.1 0.78 2,016 0.78
0.95-1.39 1,246 3.7 1.19 1,246 1.19
1.45-2.14 3,453 5.3 1.88 1,734 1.64
2.18-3.27 19,702 7.3 2.75 561 2.85
3.28-4.82 18,288 6.1 3.87 7,321 3.98
4.98-7.37 7,063 3.6 6.59 6,692 6.60
7.50-11.19 12,695 5.8 8.93 6,177 9.03
11.29-16.93 13,611 4.6 14.96 8,947 15.23
16.94-24.63 17,957 4.0 20.68 16,173 20.76
25.63-36.41 4,618 5.7 29.48 4,097 29.10
38.50-57.31 4,590 5.3 50.71 3,602 51.00
58.56-87.63 7,590 6.0 70.16 5,449 69.99
88.00-131.81 6,687 4.6 112.12 5,316 112.57
132.31-146.53 141 3.0 138.24 124 138.31
------- ------
120,264 70,060
======= ======
Senior Executive Options:
The following table summarizes stock options granted to the Senior
Executive Officers during fiscal 2003:
Individual Grants
------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
Number of % of Total of Stock Price Appreciation
Securities Options Exercise for Option Term (3)
Underlying Granted to Price Expiration --------------------------
Options Employees (1) Per Share (2) Date 5% 10%
---------- ------------- ------------- ---------- ----------- ------------
Jozef Straus, Ph.D.
Director and CEO, Emeritus 750,000 2.9% $3.31 11/24/2010 $1,185,283 $2,838,959
Syrus P. Madavi
President and Chief Operating 1,600,000 6.2 2.14 07/25/2010 1,634,807 3,915,648
Officer 500,000 1.9 3.31 11/24/2010 790,189 1,892,639
Ronald C. Foster
Executive Vice President and
Chief Financial Officer 500,000 1.9 2.81 02/16/2011 670,825 1,606,742
- ------------
(1) Based on a total of 25.9 million options granted to our employees, including
the Senior Executive Officers, during fiscal 2003.
(2) The exercise price per share of options granted represents the fair market
value of the underlying shares of common stock on the date the options were
granted.
(3) Stock price appreciation of 5% and 10% from the date of grant over a period
of ten years is assumed pursuant to the rules promulgated by the Securities
and Exchange Commission and does not represent our prediction of the future
stock price performance.
C-64
The following table presents certain information regarding option exercises
and outstanding options for the Senior Executive Officers during fiscal 2003:
Number of Securities Values of Unexercised
Underlying Unexercised "In-the-Money" Options as of
Shares Options as of June 30, 2003 June 30, 2003 (1)
Acquired on Value ----------------------------- -----------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
Jozef Straus, Ph.D. -- $ -- 9,778,369 2,419,583 $ -- $ 113,250
Syrus P. Madavi -- -- -- 2,100,000 -- 2,189,100
Ronald C. Foster -- -- -- 500,000 -- 325,500
- ------------
(1) 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 at the end of fiscal year 2003, which was
$3.46 per share.
Status of Acquired In-Process Research and Development Projects
We periodically review the stage of completion and likelihood of success of
each of the IPR&D projects. The nature of the efforts required to develop the
IPR&D projects 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 current status of the IPR&D projects for our
significant acquisitions during fiscal 2003, 2002 and 2001 is as follows:
Scion:
The products under development at the time of acquisition were comprised of
advanced integrated waveguide devices. We have incurred post-acquisition costs
of $1.7 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 projects. 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.
Datacom:
The products under development at the time of acquisition included: (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. Due to the uncertainty
of market conditions, the 10 gigabit 1310nm xenpak transceivers with digital
optical monitoring / fiber channel, the 10 gigabit 850nm xenpak transceivers and
the 10 gigabit 850nm XGP projects were terminated. We completed all remaining
projects in the second quarter of fiscal 2003 and have incurred total
post-acquisition costs of $9.1 million. The differences between the actual
outcome noted above and the assumptions used in the original valuation of the
technology did not have a significant impact on our results of operations and
financial position.
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 2004. We have incurred
post-acquisition costs of $38.1 million through the end of
C-65
fiscal 2003 with estimated costs to complete of $0.1 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.
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, 2003 and June 30, 2002 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. Due to the current level of interest rates, a decrease of
150 BPS at June 30, 2003 is not relevant. Beginning fair values represent the
principal plus accrued interest and dividends at June 30, 2003 and June 30,
2002. The following tables estimate the fair value of the portfolio at a
12-month horizon (in millions):
Valuation of
Securities Given
an Interest Fair Value Valuation of Securities
Rate Decrease as of Given an Interest Rate
of "X" BPS June 30, 2003 Increase of "X" BPS
------------------- ------------- -------------------------------
100 BPS 50 BPS 50 BPS 100 BPS 150 BPS
------- ------ ------- ------- -------
U.S. Treasuries and agencies notes $ 513 $ 511 $ 510 $ 508 $ 505 $ 503
State, municipal and county government
notes and bonds 37 37 36 36 36 36
Corporate bonds and commercial paper 389 388 387 386 385 384
Money market funds 73 73 73 73 73 73
------ ------ ------ ------ ------ ------
Total $1,012 $1,009 $1,006 $1,003 $ 999 $ 996
====== ====== ====== ====== ====== ======
Valuation of Securities Fair Value Valuation of Securities
Given an Interest Rate as of Given an Interest Rate
Decrease of "X" BPS June 30, 2002 Increase of "X" BPS
------------------------------ ------------- ------------------------------
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
====== ====== ====== ====== ====== ====== ======
C-66
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 Valuation of Securities
Securities Fair Value Given an "X%"
Given "X%" Decrease as of Increase in Each
in Each Stock's Price June 30, 2003 Stock's Price
--------------------- ------------- ------------------------
50% 35% 15% 15% 35% 50%
----- ----- ----- ----- ------- ------
Corporate equities $37 $48 $63 $74 $85 $100 $111
Valuation of Valuation of Securities
Securities Fair Value Given an "X%"
Given "X%" Decrease as of Increase in Each
in Each Stock's Price June 30, 2002 Stock's Price
--------------------- ------------- ---------------------
50% 35% 15% 15% 35% 50%
----- ----- ----- ----- ----- -----
Corporate equities $20 $27 $35 $41 $47 $55 $61
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 Canadian,
European and Taiwanese 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. At June 30, 2003,
the face value of these foreign exchange forward contracts was $97 million.
C-67
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, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2003. Our audits also included the
financial statement schedule listed in the index at Item 15(a)2. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2003, 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.
As discussed in Note 1 to the accompanying consolidated financial
statements, in 2003, JDS Uniphase Corporation changed its method of accounting
for goodwill and intangible assets.
/S/ ERNST & YOUNG LLP
San Jose, California
July 21, 2003
C-68
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share data)
Years Ended June 30,
-------------------------------------------
2003 2002 2001
-------- --------- ----------
Net sales $ 675.9 $ 1,098.2 $ 3,232.8
Cost of sales 620.5 1,171.1 2,306.7
-------- --------- ----------
Gross profit (loss) 55.4 (72.9) 926.1
Operating expenses:
Research and development 153.7 254.8 325.9
Selling, general and administrative 267.3 382.9 818.1
Amortization of goodwill -- 937.5 4,945.9
Amortization of other intangibles 19.8 371.2 441.1
Acquired in-process research and development 0.4 25.3 393.2
Reduction of goodwill 225.7 4,360.8 49,699.5
Reduction of other long-lived assets 167.9 1,618.6 385.5
Restructuring charges 121.3 260.0 264.3
-------- --------- ----------
Total operating expenses 956.1 8,211.1 57,273.5
-------- --------- ----------
Loss from operations (900.7) (8,284.0) (56,347.4)
Interest and other income, net 32.5 48.3 48.5
Gain (loss) on sale of subsidiaries' net assets (2.2) 0.1 1,770.2
Gain (loss) on sale of investments 4.0 15.0 (559.1)
Reduction in fair value of investments (45.4) (225.8) (522.1)
Loss on equity method investments (8.5) (54.6) (883.9)
-------- --------- ----------
Loss before income taxes (920.3) (8,501.0) (56,493.8)
Income tax expense (benefit) 13.5 237.3 (371.9)
-------- --------- ----------
Net loss $ (933.8) $(8,738.3) $(56,121.9)
======== ========== ==========
Net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40)
======== ========== ==========
Shares used in per-share calculation -- basic and diluted 1,419.7 1,344.3 1,091.9
======== ========== ==========
See accompanying notes to consolidated financial statements.
C-69
JDS UNIPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par-value data)
June 30, June 30,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 241.9 $ 412.4
Short-term investments 992.2 1,038.0
Accounts receivable, less allowances of $22.7 at June 30, 2003 and $42.9 at
June 30, 2002 97.5 134.4
Inventories 84.1 110.0
Refundable income taxes 39.0 60.4
Deferred income taxes 9.3 68.0
Other current assets 50.6 34.1
---------- ----------
Total current assets 1,514.6 1,857.3
Property, plant and equipment, net 283.4 491.5
Deferred income taxes 27.6 43.9
Goodwill 166.2 332.2
Other intangibles, net 88.2 177.5
Long-term investments 47.5 95.6
Other assets 10.3 6.5
---------- ----------
Total assets $ 2,137.8 $ 3,004.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48.6 $ 66.2
Accrued payroll and related expenses 47.2 70.2
Income taxes payable 39.0 31.3
Deferred income taxes 9.3 2.2
Restructuring accrual 134.1 95.8
Warranty accrual 52.4 73.6
Other current liabilities 92.2 143.2
---------- ----------
Total current liabilities 422.8 482.5
Deferred income taxes 27.6 41.7
Other non-current liabilities 16.3 8.9
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares: 1,000,000
Series A: 0 and 100,000 shares issued and outstanding at June 30, 2003 and
June 30, 2002, respectively -- --
Series B: 100,000 shares authorized at June 30, 2003 and 2002 -- --
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:
1,431,324,217 at June 30, 2003 and 1,370,482,388 at June 30, 2002 1.4 1.4
Common stock to be issued -- 111.7
Additional paid-in capital 68,557.3 68,399.0
Deferred compensation (1.7) (54.2)
Accumulated deficit (66,896.5) (65,962.7)
Accumulated other comprehensive income (loss) 10.6 (23.8)
---------- ----------
Total stockholders' equity 1,671.1 2,471.4
---------- ----------
Total liabilities and stockholders' equity $ 2,137.8 $ 3,004.5
========== ==========
See accompanying notes to consolidated financial statements.
C-70
JDS UNIPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended June 30,
----------------------------------------
2003 2002 2001
--------- --------- ----------
OPERATING ACTIVITIES:
Net loss $ (933.8) $(8,738.3) $(56,121.9)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation expense 59.4 336.6 155.4
Amortization expense 19.8 1,308.7 5,387.0
Amortization of deferred compensation and other stock-based compensation expense 50.9 124.9 52.6
Acquired in-process research and development 0.4 25.3 393.2
Reduction of goodwill and other long-lived assets 393.6 5,979.4 50,085.0
(Gain) loss on sale of subsidiaries' assets 2.2 (0.1) (1,770.2)
(Gain) loss on sale of investments (4.0) (15.0) 559.1
Reduction in fair value of investments 45.4 225.8 522.1
Loss on equity method investments 8.5 54.6 883.9
Loss on disposal of property and equipment 1.9 19.5 --
Non-cash restructuring charges 42.4 148.3 133.3
Tax benefit on non-qualified stock options -- 23.0 142.7
Change in deferred income taxes, net 61.1 340.8 (598.3)
Changes in operating assets and liabilities:
Accounts receivable 39.5 343.7 (21.0)
Inventories 21.1 194.3 190.3
Other current assets 38.4 (9.3) (92.4)
Income taxes payable 2.1 0.7 (31.3)
Accounts payable and other liabilities (68.9) (277.2) 183.7
--------- --------- ----------
Net cash provided by (used in) operating activities (220.0) 85.7 53.2
--------- --------- ----------
INVESTING ACTIVITIES:
Purchases of available-for-sale investments (2,592.8) (3,971.4) (1,523.7)
Purchases of other investments (1.5) (46.8) (70.3)
Sales of available-for-sale investments 2,679.6 3,798.5 2,164.4
Sales of other investments -- 38.0 --
Acquisitions of businesses, net of cash acquired (34.4) (176.9) 175.7
Purchase of property, plant and equipment and licenses (47.2) (132.5) (735.3)
Proceeds from sale of property, plant and equipment 28.4 9.8 --
Other assets, net 1.6 8.6 (14.1)
--------- --------- ----------
Net cash provided by (used in) investing activities 33.7 (472.7) (3.3)
--------- --------- ----------
FINANCING ACTIVITIES:
Repayment of debt acquired (0.8) (32.8) (26.6)
Proceeds from issuance of common stock other than in a public offering 21.4 65.1 417.7
--------- --------- ----------
Net cash provided by financing activities 20.6 32.3 391.1
--------- --------- ----------
Effect of exchange rates on cash and cash equivalents (4.8) 4.3 2.8
Increase (decrease) in cash and cash equivalents (170.5) (350.4) 443.8
Cash and cash equivalents at beginning of period 412.4 762.8 319.0
--------- --------- ----------
Cash and cash equivalents at end of period $ 241.9 $ 412.4 $ 762.8
========= ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1.2 $ 1.9 $ 1.7
Cash paid for taxes 8.0 20.3 174.0
Cash received for tax refunds 83.1 121.8 20.0
Non-cash transactions:
Proceeds from sale of subsidiaries net assets $ 8.5 $ -- $ 1,953.3
Common stock issued in connection with acquisitions 30.0 274.2 41,446.2
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
Common stock issued in connection with the acquisition of UNL 111.7 -- --
See accompanying notes to consolidated financial statements.
C-71
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, 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
Shares issued under employee stock
plans and related tax benefits -- -- 11.9 -- --
Common stock issued in connection
with acquisitions, net of issuance
costs (0.1) -- 48.9 -- (111.7)
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, 2003 -- $-- 1,431.3 $1.4 $ --
==== ==== ======= ==== =======
Accumulated
Additional Other
Paid-In Deferred Accumulated Comprehensive
Capital Compensation Deficit Loss Total
---------- ------------ ----------- ------------- ----------
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
Shares issued under employee stock
plans and related tax benefits 21.1 -- -- -- 21.1
Common stock issued in connection
with acquisitions, net of issuance
costs 141.7 -- -- -- 30.0
Payments on stockholders' note
receivable 0.2 -- -- -- 0.2
Deferred stock-based compensation
related to acquisition -- (0.1) -- -- (0.1)
Amortization of deferred compensation -- 47.9 -- -- 47.9
Reversal of deferred compensation (4.7) 4.7 -- -- --
Net loss -- -- (933.8) -- (933.8)
Change in net unrealized gains on
available-for-sale investments -- -- -- 25.9 25.9
Foreign currency translation adjustment -- -- -- 8.5 8.5
Comprehensive loss -- -- -- -- (899.4)
--------- ------- ---------- ------ ----------
Balance at June 30, 2003 $68,557.3 $ (1.7) $(66,896.5) $ 10.6 $ 1,671.1
========= ======= ========== ====== ==========
See accompanying notes to consolidated financial statements.
C-72
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.
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 2003 ended on June 28, 2003, whereas fiscal 2002 and
2001 ended on June 29, 2002 and June 30, 2001, 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 include the
Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
Reclassifications:
The following amounts reported in prior years have been reclassified to
conform to the current year presentation:
Consolidated Balance Sheets:
o Goodwill and other purchased intangibles of $509.7 million as of June
30, 2002 is now separated into goodwill of $332.2 million and other
purchased intangibles of $177.5 million.
o Current portion of capital lease obligations of $1.3 million as of June
30, 2002 is now included in other current liabilities of $143.2 million.
In addition, long-term portion of capital lease obligations of $5.5
million as of June 30, 2002 is now included in other non-current
liabilities of $8.9 million.
C-73
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Consolidated Statements of Operations:
o Amortization of purchased intangibles of $1,308.7 million for fiscal
2002 is now separated into amortization of goodwill of $937.5 million
and amortization of other purchased intangibles of $371.2 million. In
addition, amortization of purchased intangibles of $5,387.0 million for
fiscal 2001 is now separated into amortization of goodwill of $4,945.9
million and amortization of other purchased intangibles of $441.1
million.
o Reductions of goodwill and other long-lived assets of $5,979.4 million
for fiscal 2002 are now separated into reductions of goodwill of
$4,360.8 million and reductions of other long-lived assets of $1,618.6
million. In addition, reductions of goodwill and other long-lived assets
of $50,085.0 million for 2001 are now separated into reductions of
goodwill of $49,699.5 million and reductions of other long-lived assets
of $385.5 million.
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and the
reported amount of net sales and expenses during the period. The Company bases
estimates on historical experience and on various assumptions about the future
that are believed to be reasonable based on available information. The Company's
reported financial position or results of operations may be materially different
under different conditions or when using different estimates and assumptions,
particularly with respect to critical accounting policies, which are discussed
below. In the event that estimates or assumption prove to differ from actual
results, adjustments are made in subsequent periods to reflect more current
information.
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.
C-74
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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 $1.6 million and $2.3 million
during fiscal 2003 and fiscal 2002, respectively.
Goodwill:
Goodwill represents the excess of the purchase price of an acquired
enterprise or assets over the fair values of the identifiable assets acquired
and liabilities assumed. Commencing July 1, 2002, the Company no longer
amortizes goodwill, but tests for impairment of goodwill on an annual basis and
at any other time if events occur or circumstances indicate that the carrying
amount of goodwill may not be recoverable (see Note 11).
Circumstances that could trigger an impairment test include but are not
limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit or
significant portion of a reporting unit will be sold or otherwise disposed;
results of testing for recoverability of a significant asset group within a
reporting unit; and recognition of a goodwill impairment loss in the financial
statements of a subsidiary that is a component of a reporting unit.
If the carrying amount of the reporting unit goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recorded in net earnings
(loss). Measurement of the fair value of a reporting unit is based on one or
more of the following fair value measures including: amounts at which the unit
as a whole could be bought or sold in a current transaction between willing
parties; using present value techniques of estimated future cash flows; or using
valuation techniques based on multiples of earnings or revenue, or a similar
performance measure.
C-75
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Intangible Assets:
Other intangible assets consist primarily of intellectual property acquired
and purchased intangible assets. Purchased intangible assets primarily include
existing and core technology, trademarks and trade names, and customer base.
Other intangible assets are amortized using the straight-line method over
estimated useful lives ranging from 1 to 15 years.
Impairment or disposal of long-lived assets (plant and equipment and intangible
assets):
Long-lived assets held and used:
The Company tests long-lived assets or asset groups for recoverability when
events or changes in circumstances indicate that their carrying amount may not
be recoverable. Circumstances which could trigger a review include, but are not
limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed significantly before the end of its estimated useful
life (see Note 12).
Recoverability is assessed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances. An
impairment loss is recognized when the carrying amount is not recoverable and
exceeds fair value.
Long-lived assets held for sale:
Long-lived assets are classified as held for sale when certain criteria are
met, which include: management commitment to a plan to sell the assets; the
availability of the assets for immediate sale in their present condition;
whether an active program to locate buyers and other actions to sell the assets
has been initiated; whether the sale of the assets is probable and their
transfer is expected to qualify for recognition as a completed sale within one
year; whether the assets are being marketed at reasonable prices in relation to
their fair value; and how unlikely it is that significant changes will be made
to the plan to sell the assets (see Note 12).
The Company measures long-lived assets to be disposed of by sale at the
lower of carrying amount and fair value less cost to sell. Fair value is
determined using quoted market prices or the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Postemployment Benefits
Postemployment benefits accrued for workforce reductions under the
Company's Global Realignment Program related to restructuring activities
initiated after December 31, 2002 are accounted for under SFAS No.112,
Employer's Accounting for Postemployment Benefits. A liability for
postemployment benefits is recorded when payment is probable, the amount is
reasonably estimable, and the obligation relates to rights that have vested or
accumulated.
Concentration of Credit and Other Risks and Allowance for Doubtful Accounts:
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
C-76
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 generally does not require collateral from its customers. These
evaluations require significant judgement and are based on a variety of factors
including, but not limited to, current economic trends, historical payment and
bad debt write-off experience.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability or unwillingness of its customers to make
required payments. When the Company becomes aware that a specific customer is
unable to meet its financial obligations, the Company records a specific
allowance to reflect the level of credit risk in the customer's outstanding
receivable balance. In addition, the Company records additional allowances based
on certain percentages of aged receivable balances. The Company records bad debt
expenses as selling, general and administrative expenses.
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. At June 30, 2003, SICPA accounted for
12% of the Company's gross accounts receivable. At June 30, 2002, Lucent
Technologies ("Lucent") accounted for 12% of the Company's gross accounts
receivable.
The Company depends on a single or limited number of contract
manufacturers, fewer subcontractors, 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, customer forecasts, 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.
C-77
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company conducts its business and sells its products directly to
customers primarily in North America, Europe and Asia. 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, 2003, the face value of
these foreign currency forward contracts was $97.0 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 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 $1.0 million in fiscal 2003, $1.4 million in fiscal 2002, and $4.0
million in fiscal 2001.
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 on a straight-line basis, 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 expands the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition provisions of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The transition provisions do not currently
have an impact on the Company's consolidated financial position and results of
operations as the Company has not elected to adopt the fair value-based method
of accounting for stock-based employee compensation under SFAS No. 123. The
disclosure provisions of SFAS No. 148 are effective for financial statements for
interim periods beginning after December 15, 2002. The Company adopted the
disclosure requirements in the third quarter of fiscal 2003.
C-78
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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,
--------------------------------------------
2003 2002 2001
--------- --------- ----------
Reported net loss $ (933.8) $(8,738.3) $(56,121.9)
Add back employee stock option expense measured under APB 25 50.9 124.9 52.6
Less employee stock option expense measured under SFAS 123 (685.2) (688.9) (566.2)
--------- --------- ----------
Pro forma net loss $(1,568.1) $(9,302.3) $(56,635.5)
========= ========= ==========
Reported net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40)
========= ========= ==========
Pro forma net loss per share -- basic and diluted $ (1.10) $ (6.92) $ (51.87)
========= ========= ==========
Please refer to Note 9 for additional information on the assumptions used
in the SFAS 123 charge.
Comprehensive Income (Loss):
The Company's accumulated other comprehensive income (loss) consists of the
accumulated net unrealized gains or losses on available-for-sale investments and
foreign currency translation adjustments. At June 30, 2003 and 2002, the Company
had a balance of net unrealized gains of $29.2 million and $3.3 million,
respectively, on available-for-sale investments. Additionally, at June 30, 2003
and June 30, 2002, the Company had $18.6 million and $27.1 million,
respectively, of foreign currency translation losses.
The components of comprehensive loss were as follows (in millions):
Years Ended June 30,
------------------------------------------
2003 2002 2001
------- --------- ----------
Net loss $(933.8) $(8,738.3) $(56,121.9)
Changes in net unrealized gains on available-for-sale
investments 25.9 (2.5) 7.7
Changes in foreign currency translation:
Write-off of currency translation adjustment related to
disposal of foreign operations -- 0.9 --
Other changes 8.5 2.2 (14.9)
------- --------- ----------
Comprehensive loss $(899.4) $(8,737.7) $(56,129.1)
======= ========= ==========
Net Loss Per Share:
As the Company incurred net losses in fiscal 2003, 2002 and 2001, the
effect of dilutive securities totaling 4.3 million, 48.5 million and 47.3
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,
-------------------------------------------
2003 2002 2001
-------- --------- ----------
Numerator:
Net loss $ (933.8) $(8,738.3) $(56,121.9)
======== ========= ==========
Denominator:
Weighted-average number of common shares outstanding 1,419.7 1,344.3 1,091.9
======== ========= ==========
Net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40)
======== ========= ==========
C-79
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
purchased intangibles 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 other purchased intangibles previously recorded in acquisitions
prior to July 1, 2001 and determined that as of July 1, 2002, the Company had
approximately $10.8 million of separately recognized purchased intangibles,
consisting of acquired assembled workforce, that did not meet the new
recognition criteria for an intangible asset to be recognized apart from
goodwill. This amount 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 other purchased intangibles with indefinite
useful lives are no longer amortized but are reviewed for impairment annually,
or more frequently if certain events or changes in circumstances indicate that
the carrying value may not be recoverable. Purchased intangibles with finite
useful lives continue to be amortized over their useful lives and are reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."
The Company adopted SFAS No. 142 on July 1, 2002. In conjunction with the
implementation of SFAS No. 142, the Company completed the transitional
impairment review related to the carrying value of goodwill as of July 1, 2002
and determined that there was no impairment beyond amounts previously recorded
as of that date.
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 (see Note 3); and
(iii) assembled workforce, net of the related tax effect, was as follows (in
millions, except per-share data):
Years Ended June 30,
------------------------------------------
2003 2002 2001
------- --------- ----------
Reported net loss $(933.8) $(8,738.3) $(56,121.9)
Add back:
Amortization of:
Goodwill from acquisitions -- 937.5 4,945.9
Equity method goodwill related to ADVA -- 0.7 136.2
Assembled workforce -- 12.5 16.6
Income tax expense -- (32.1) (94.0)
------- --------- ----------
Adjusted net loss $(933.8) $(7,819.7) $(51,117.2)
======= ========= ==========
Reported net loss per share -- basic and diluted $ (0.66) $ (6.50) $ (51.40)
======= ========= ==========
Adjusted net loss per share -- basic and diluted $ (0.66) $ (5.82) $ (46.81)
======= ========= ==========
SFAS No. 144: In August 2001, the FASB issued SFAS No. 144, which
supersedes 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
C-80
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. During
fiscal 2003, the Company recorded impairment charges of $167.9 million, under
SFAS No. 144 (see Note 12).
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 ("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.
During fiscal 2003, the Company recorded restructuring charges of $2.7 million
under SFAS 146 for lease costs associated with Phase 7 of its Global Realignment
Program. As the Company continues to restructure its business under its Global
Realignment Program (see Note 13), the Company expects to record additional
restructuring charges under SFAS 146.
FASB Interpretation No. 45: In November 2002, the FASB issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
requires a guarantor to recognize and measure certain types of guarantees at
fair value. In addition, Interpretation No. 45 requires the guarantor to make
new disclosures for these guarantees and other types of guarantees that are not
subject to the initial recognition and initial measurement provisions. The
disclosure requirements were effective for financial statements for interim or
annual periods ended after December 15, 2002, while the recognition and
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company adopted the disclosure
provisions of Interpretation No. 45 during the second quarter of fiscal 2003 and
the initial recognition and initial measurement provisions in the third quarter
of fiscal 2003. The adoption of Interpretation No. 45 did not have a material
impact on the Company's financial position or results of operations.
FASB Interpretation No. 46: In January 2003, the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51," which requires an investor with a majority of the variable interests
(primary beneficiary) in a variable interest entity to consolidate the assets,
liabilities and results of operations of the entity. A variable interest entity
is an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from other parties.
Interpretation No. 46 is applicable: (i) immediately for all variable interest
entities created after January 31, 2003; or (ii) in the first fiscal year or
interim period beginning after June 15, 2003 for those created before February
1, 2003. As of June 30, 2003, the Company had one operating lease pertaining to
two separate properties, generally known as a "synthetic lease," which the
Company purchased subsequent to the end of fiscal 2003. Please refer to Note 7
and Note 21 below for further discussion of the operating lease and subsequent
purchase of the property.
In addition, the Company is currently reviewing its cost and equity method
investments acquired prior to February 1, 2003 to determine whether those
entities are variable interest entities and, if so, if the Company is the
primary beneficiary of any of its investee companies. At June 30, 2003, the
Company had 23 cost and equity method investments primarily in privately held
companies and venture funds that have the potential to provide strategic
technologies and relationships to the Company's businesses. The Company expects
to complete the review during the first quarter of fiscal 2004. Provided the
Company is not the primary beneficiary, the Company's maximum exposure to loss
for these investments at June 30, 2003 is limited to the carrying amount of its
investment of $37.6
C-81
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
million in such entities and its minimum funding commitments of $21.4 million.
The consolidation of any investee companies under Interpretation No. 46 could
adversely affect the financial position and results of operations of the
Company.
Emerging Issues Task Force Issue No. 00-21: In November 2002, the EITF
reached a consensus on Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with
Multiple Deliverables," which provides guidance on the timing and method of
revenue recognition for arrangements that include the delivery of more than one
product or service. EITF 00-21 is effective for arrangements entered into in
periods beginning after June 15, 2003. The Company does not expect adoption to
have a material impact on its financial position or results of operations.
Note 2. Balance Sheet Details
Inventories:
The components of inventories were as follows (in millions):
June 30,
-------------------
2003 2002
------ ------
Finished goods $22.9 $ 46.7
Work in process 32.8 36.9
Raw materials and purchased parts 28.4 26.4
----- ------
Total inventories $84.1 $110.0
===== ======
During fiscal 2003, 2002 and 2001, the Company recorded write-downs of
inventories of $60.1 million, $203.9 million and $510.6 million, respectively,
and losses on purchase commitments of $7.4 million, $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,
-------------------
2003 2002
------- ------
Land $ 21.4 $ 36.0
Buildings and improvements 92.8 112.9
Machinery and equipment 247.2 160.1
Furniture, fixtures, software and office equipment 85.1 119.5
Leasehold improvements 31.3 9.1
Construction in progress 37.5 132.8
------- ------
515.3 570.4
Less: accumulated depreciation (231.9) (78.9)
------- ------
Total property, plant and equipment, net $ 283.4 $491.5
======= ======
During fiscal 2003, 2002 and 2001, the Company recorded $99.3 million,
$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. 144 and SFAS No. 121 (see Note 12),
excluding asset write-downs associated with the Global Realignment Program.
C-82
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Current Liabilities:
The components of other current liabilities were as follows (in millions):
June 30,
-------------------
2003 2002
------ ------
Deferred revenue $17.2 $ 27.4
Losses on purchase commitments 8.7 24.0
Other 66.3 91.8
----- ------
Total other current liabilities $92.2 $143.2
===== ======
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, 2003,
the Company's available-for-sale investments were as follows (in millions):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Debt investments:
Floating rate bonds $ 43.4 $ -- $ -- $ 43.4
Municipal bonds & sovereign debt instruments 36.0 0.4 -- 36.4
Auction instruments 160.3 -- -- 160.3
Corporate bonds 175.2 3.2 -- 178.4
Agency bonds 497.4 2.3 (0.1) 499.6
-------- ----- ----- --------
Total debt investments 912.3 5.9 (0.1) 918.1
Money market instruments and funds 87.7 -- -- 87.7
Marketable equity investments 41.4 33.0 (0.2) 74.2
-------- ----- ----- --------
Total available-for-sale investments $1,041.4 $38.9 $(0.3) $1,080.0
======== ===== ===== ========
Of the total estimated fair value, $87.7 million was classified as cash
equivalents and $992.2 million was classified as short-term investments in the
Company's Consolidated Balance Sheet.
At June 30, 2002, the Company's available-for-sale investments were as
follows (in millions):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair 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
======== ==== ===== ========
C-83
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, 2003, contractual maturities of the Company's debt investments
were as follows (in millions):
Amortized Estimated
Cost Fair Value
--------- ----------
Amounts maturing in less than 1 year $664.8 $667.4
Amounts maturing in 1-3 years 247.5 250.7
------ ------
Total debt investments $912.3 $918.1
====== ======
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, 2003 and 2002
with fair values of $67.4 million and $35.8 million, respectively.
Long-Term Investments:
The components of the Company's long-term investment were as follows (in
millions):
June 30,
-----------------
2003 2002
---- ----
Non-marketable equity investments $30.0 $79.5
Equity method investments 17.5 16.1
----- -----
Total long-term investments $47.5 $95.6
===== =====
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 2003, 2002 and 2001,
the Company recorded $45.4 million, $225.8 million and $522.1 million,
respectively, of other-than-temporary reductions in fair value of the Company's
available-for-sale and non-marketable equity investments. Details of the
other-than-temporary reductions were as follows (in millions):
Years Ended June 30,
---------------------------------
2003 2002 2001
------ ------ ------
Available-for-sale investments:
Nortel common stock $ -- $187.3 $511.8
Other -- 9.6 10.3
Non-marketable equity investments:
Adept Technology ("Adept") 25.0 -- --
Other 20.4 28.9 --
----- ------ ------
Total reductions in fair value of investments $45.4 $225.8 $522.1
===== ====== ======
During fiscal 2002, the Company entered into an automation development
alliance agreement with Adept (see Note 15). In connection with this alliance,
the Company invested $25.0 million in Adept's convertible preferred stock.
During fiscal 2003, the Company determined that the decline in fair value of its
Adept investment was other-than-temporary and wrote the investment down to zero.
Should the fair value of the Company's investments continue to decline in
future periods, the Company may be required to record additional charges if the
decline is determined to be other-than-temporary.
C-84
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 2003,
the Company had a 28% ownership in ADVA. During fiscal 2003, 2002 and 2001, the
Company recorded $0, $0.7 million, $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 2003, 2002 and 2001, the Company recorded total charges of
$0, $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 2003, 2002 and 2001, under the equity method, the Company
recorded $0, $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 2003, 2002 and 2001, the Company recorded $8.5 million and
$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.
C-85
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4. Goodwill
The following table presents the changes in goodwill allocated to the
reportable segments (in millions):
Communications Thin Film
Products Products
Group Group Total
-------------- --------- ---------
Balance as of June 30, 2001 $4,680.2 $ 650.4 $ 5,330.6
Amortization (871.3) (66.2) (937.5)
Acquisitions (see Note 16):
Scion 21.9 -- 21.9
Datacom 214.9 -- 214.9
SFAS No. 121 impairment charges (see Note 11) (3,780.8) (580.0) (4,360.8)
Purchase price adjustment related to the achievement of milestones 26.9 36.2 63.1
--------- ------- ---------
Balance as of June 30, 2002 $ 291.8 $ 40.4 $ 332.2
Assembled workforce reclassified as goodwill 8.6 2.2 10.8
Acquisitions (see Note 16):
OptronX's transceiver/transponder unit 5.1 -- 5.1
Datacom (2.7) -- (2.7)
LAL -- 7.1 7.1
Triquint's pump laser business 4.6 -- 4.6
SFAS No. 142 impairment charges (see Note 11) (225.7) -- (225.7)
Tax adjustment related to SDL and Fitel acquisitions (see Note 14) 5.5 -- 5.5
Purchase price adjustment related to the achievement of milestones -- 29.3 29.3
--------- ------- ---------
Balance as of June 30, 2003 $ 87.2 $ 79.0 $ 166.2
========= ======= =========
Purchase price adjustment related to the achievement of milestones:
In September 2000, the Company acquired Epion Corporation ("Epion"). The
purchase agreement provides for the issuance of additional shares of the
Company's common stock subject to the completion of certain milestones. During
fiscal 2002, Epion achieved 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 stock-based
compensation expense, and $0.5 million was recorded as deferred compensation
related to unvested options. During fiscal 2003, Epion achieved a milestone that
resulted in the Company issuing 9.7 million shares of the Company's common stock
valued at $30.0 million, of which $27.0 million was recorded as goodwill, $2.9
million was recorded as stock-based compensation expense, and $0.1 million was
recorded as deferred compensation related to unvested options.
During fiscal 2002, Optical Process Automation Corp. ("OPA") reached
several milestones and the Company removed the 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 2002, the Company recorded $20.8 million of additional
goodwill related to the acquisition of UNL in fiscal 1998, in final settlement
of its obligation related to UNL shipments for a four-year earn-out period.
In addition, during fiscal 2003 and 2002, the Company issued payments of
$2.3 million and $9.1 million, respectively, in connection with milestones
achieved by another acquired entity. The Company recorded the entire payments as
goodwill.
C-86
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5. Other Intangibles
The following tables present details of the Company's other intangibles (in
millions):
Gross
Carrying Accumulated
As of June 30, 2003: Amount Amortization Net
- -------------------- -------- ------------ -----
Developed technology $107.7 $(43.0) $64.7
Other 37.8 (14.3) 23.5
------ ------ -----
Total intangibles $145.5 $(57.3) $88.2
====== ====== =====
Gross
Carrying Accumulated
As of June 30, 2002: Amount Amortization Net
- -------------------- -------- ------------ ------
Developed technology $182.2 $ (52.5) $129.7
Other 278.5 (230.7) 47.8
------ ------- ------
Total intangibles $460.7 $(283.2) $177.5
====== ======= ======
During fiscal 2003, 2002 and 2001, the Company recorded $19.8 million,
$371.2 million, and $441.1 million, respectively, of amortization of
intangibles. During fiscal 2003, 2002 and 2001, the Company recorded $68.6
million, $1,243.1 million and $375.3 million, respectively, of reductions in the
carrying value of other intangibles as a result of impairment analyses performed
in accordance with SFAS 144 and SFAS No. 121 (see Note 12).
Based on the carrying amount of the intangibles as of June 30, 2003, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows (in millions):
Years Ended June 30,
- --------------------
2004 $15.6
2005 15.0
2006 13.4
2007 10.4
2008 5.7
Thereafter 28.1
-----
Total amortization $88.2
=====
Note 6. Letters and Line of Credit
As of June 30, 2003, the Company had three standby letter of credit
facilities totaling $7.9 million. In addition, the Company had an operating bank
line of credit of $5.0 million. Advances under the line of credit bear interest
at the U.S. prime rate. As of June 30, 2003, the interest rate was 4.0% and the
Company had no outstanding borrowings under the line of credit.
Note 7. Commitments and Contingencies
Lease Commitments
Operating Leases:
As of June 30, 2003, 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.
This arrangement is a variable interest entity as defined under FASB
Interpretation No. 46 and the Company is the primary beneficiary. Under a
related credit agreement, a group of financial institutions has committed to
fund the Lessor a maximum of $59.6 million
C-87
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
to develop the projects. As of June 30, 2003, $42.3 million has been drawn and
no further withdrawal is permitted as the funding period has expired in
accordance with the lease agreement. 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 $44.7 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 pay up to approximately
$37.5 million of any shortfall.
On an annual basis or when indicators of impairment exist, the Company is
required to evaluate the expected fair value of the properties at the end of the
lease term. In the event the Company determines that it is probable and
estimable that the expected fair value of the properties at the end of the lease
term will be less than the Termination Value, the Company accrues for the
estimated loss. The Company recorded the following amounts in connection with
the estimated loss on the properties (in millions):
Years Ended June 30,
----------------------------
2003 2002 2001
------ ------ -----
Raleigh, North Carolina properties $3.7 $11.8 $--
Melbourne, Florida properties 6.9 -- --
----- ----- ---
Total $10.6 $11.8 $--
===== ===== ===
Raleigh, North Carolina Properties:
In connection with its Phase 2 restructuring activities, the Company
announced its plan to vacate buildings located in the Raleigh, North Carolina
site (see Note 13). During fiscal 2002, the Company noted indicators of
impairment and accrued losses of $11.8 million, representing the difference
between the expected fair value of the properties at the end of the lease term
and their carrying value. During fiscal 2003, the Company noted indicators of
impairment and accrued additional losses of $3.7 million. The Company recorded
these charges under "Restructuring charges" in the Consolidated Statements of
Operations.
Melbourne, Florida Properties:
During fiscal 2003, the Company noted indicators of impairment and accrued
losses of $6.9 million and recorded such amounts as deferred assets, which are
being amortized on a straight-line basis through the end of the lease term. As
of June 30, 2003, $2.3 million was included under "Other current assets" and
$2.7 million was included under "Other assets" in the Consolidated Balance
Sheet. Amortization expense totaled $1.9 million during fiscal 2003 and was
recorded under "Selling, general and administrative expense" in the Consolidated
Statement of Operations.
Neither the real estate assets nor the debt associated with the development
of the projects was included on the Company's Consolidated Balance Sheet as of
June 30, 2003. Beginning in the first quarter of fiscal 2004, the Company will
be required to consolidate the real estate assets and liabilities associated
with the operating lease in accordance with Interpretation No. 46 and the impact
on the Company's financial position and results of operations will be as
follows:
C-88
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Consolidated Balance Sheet:
Accounts Explanation of Impact
- -------- ---------------------
Other current assets Decrease by $2.3 million due to the recognition of deferred impairment charges
related to the Melbourne, Florida properties.
Property, plant and (i) Increase by $41.9 million for the net book value of the properties in both
equipment, net locations;
(ii) Decrease by the $15.5 million accrued loss recorded in connection with the
Raleigh, North Carolina properties; and
(iii) Decrease by the $6.9 million accrued loss recorded in connection with the
Melbourne, Florida properties.
Other assets Decrease by $2.7 million due to the recognition of deferred impairment charges
related to the Melbourne, Florida properties.
Restructuring accrual (i) Decrease by the $15.5 million accrued loss associated with the Raleigh, North
Carolina properties; and
(ii) Decrease by $0.1 million due to the reversal of accrued lease charges associated
with the Raleigh, North Carolina properties.
Other non-current (i) Increase by $44.7 million related to the Company's debt obligations associated
liabilities with the properties in both locations.
(ii) Decrease by the $6.9 million accrued loss associated with the Melbourne,
Florida properties.
Accumulated deficit (i) Increase by $5.0 million for the decrease in the fair value of the Melbourne,
Florida properties; and
(ii) Increase by $2.6 million due to the difference between the assets and liabilities
added to the balance sheet, which is offset by the reversal of accrued lease charges
associated with the Raleigh, North Carolina properties.
Consolidated Statement of Operations:
Accounts Explanation of Impact
- -------- ---------------------
Reduction of long- Increase by $5.0 million for the decrease in the fair value of the Melbourne, Florida
lived assets properties.
Cumulative effect of Increase by $2.6 million due to the difference between the assets and liabilities added a
change in to the balance sheet, which is offset by the reversal of accrued lease charges
accounting principle associated with the Raleigh, North Carolina
properties.
As of June 30, 2003, the Company restricted $47.7 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.
Subsequent to the end of fiscal 2003, the Company purchased the properties
discussed above for approximately $44.7 million in cash. The transaction closed
on September 16, 2003 (See Note 21).
C-89
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company leases other facilities under operating lease agreements that
expire at various dates through fiscal 2018. As of June 30, 2003, 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,
- --------------------
2004 $ 31.5
2005 30.8
2006 29.5
2007 25.7
2008 19.3
Thereafter 75.7
------
Total minimum lease payments $212.5
======
Included in the future minimum lease payments table above are $131.8
million related to lease commitments in connection with the Company's Global
Realignment Program (see Note 13).
The aggregate future minimum rentals to be received under non-cancelable
subleases totaled $8.1 million as of June 30, 2003. Rental expense was $27.8
million in fiscal 2003, $37.5 million in fiscal 2002, and $32.4 million in
fiscal 2001.
Capital Leases:
As of June 30, 2003, the Company had one building lease in Beijing, China
that was classified as a capital lease in accordance with SFAS No. 13,
"Accounting for Leases." As of June 30, 2003, the gross carrying amounts of the
building was $6.8 million and total accumulated amortization expense was $0.8
million. Amortization expense related to the building 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, 2003:
Years Ended June 30,
- --------------------
2004 $ 0.8
2005 0.8
2006 0.8
2007 0.9
2008 0.9
Thereafter 2.3
-----
Total minimum lease payments 6.5
Less: amount representing interest (1.0)
-----
Present value of minimum lease payments $ 5.5
=====
The building lease bears an interest rate of 4.6%.
Note 8. 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
C-90
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, the first of numerous federal securities class
actions was filed against the Company and several of its current and former
officers and directors. On July 26, 2002, the Northern District of California
consolidated all the securities actions then filed in or transferred to that
court 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.
An amended consolidated complaint was filed on October 11, 2002. It
purports to be brought on behalf of a class consisting of those who acquired the
Company's securities from July 27, 1999 through July 26, 2001, as well as on
behalf of subclasses consisting of those who acquired the Company's common stock
pursuant to its acquisitions of OCLI, E-TEK and SDL. The complaint seeks
unspecified damages and alleges various violations of the federal securities
laws, specifically Sections 10(b), 14(a), 20(a) and 20A of the Securities
Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of
1933. It also names one of the Company's stockholders as a defendant. On
December 13, 2002, the Company moved to dismiss the amended consolidated
complaint. On March 14, 2003, the court dismissed the complaint with leave to
amend. No trial date has been set.
On July 26, 2002, a securities class action captioned Zelman v. JDS
Uniphase Corp., 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 alleged 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 action was transferred to the Northern
District of California on September 11, 2002, and assigned a Northern District
case number, No. C-02-4656 MJJ. On October 31, 2002, the district court related
the action to In re JDS Uniphase Corporation Securities Litigation, but did not
consolidate the two actions. On January 7, 2003, the Court appointed Shirley
Zelman lead plaintiff. The plaintiff has agreed that JDSU need not respond to
the complaint at this time. No trial date has been set.
The Derivative Actions:
Eleven 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. The actions seek unspecified damages and no trial date has
been set in any of them. Several of the actions have been consolidated,
resulting in the following surviving actions: In re JDS Uniphase Corporation
Derivative Litigation, Master File No. CV806911, filed April 11, 2002, in
California Superior Court for the County of Santa Clara; Corwin v. Kaplan, No.
C-02-2020 CW, filed April 24, 2002, in the District Court for the Northern
District of California; and Cromas v. Straus, Civil Action No. 19580, filed
April 25, 2002, in the Delaware Court of Chancery for New Castle County.
In the Corwin case, the Company moved to dismiss on December 13, 2002. On
March 14, 2003, the court dismissed the complaint with leave to amend and set a
schedule for the filing of an amended complaint. No trial date has been set.
C-91
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In In re JDS Uniphase Corporation Derivative Litigation, plaintiffs filed a
consolidated amended derivative complaint on March 13, 2003. That complaint
asserted claims for breach of fiduciary duty, waste of corporate assets, abuse
of control, gross mismanagement, unjust enrichment, and constructive fraud
against JDSU and certain of its current and former officers and directors. The
complaint also asserted claims for violation of California Corporations Code
Sections 25402 and 25502.5 against defendants who sold JDSU stock and asserts
claims for breach of contract, professional negligence, and negligent
misrepresentation against JDSU's auditor, Ernst & Young. On June 10, 2003, the
Court stayed the action pending resolution of the federal actions. On August 21,
2003, the court scheduled a case management conference for November 25, 2003. No
trial date has been set in either the state or federal court actions.
In the Cromas case, no proceedings have occurred to date.
The OCLI Shareholder Action:
On February 3, 2003, an action captioned Pang v. Dwight, No. 02-231989, was
filed in California Superior Court for the County of Sonoma. The complaint
purports to be brought on behalf of a class of former shareholders of OCLI who
exchanged their OCLI shares for JDSU shares when JDSU acquired OCLI. The
complaint names the former directors of OCLI as defendants and asserts causes of
action for breach of fiduciary duty and breach of the duty of candor. The action
seeks unspecified damages, and no trial date has been scheduled. As discussed
below, the petitions to coordinate this action with the SDL Actions and In re
JDS Uniphase Corporation Derivative Litigation were denied.
The SDL Shareholder Actions
Three actions have been filed in California Superior Court for the County
of Santa Clara by stockholders purporting to represent a class of former
shareholders of SDL who exchanged their SDL shares for JDSU shares when JDSU
acquired SDL. The complaints name the former directors of SDL as defendants,
assert causes of action for breach of fiduciary duty and breach of the duty of
disclosure, and seek unspecified damages. These action include: Cook v Scifres,
No. CV814824, filed February 18, 2003, Anish v. Scifres, No. CV815738, filed
March 24, 2003, and Vajdos v. Scifres, No. CV816087, filed April 7, 2003. On
April 4, 2003, the plaintiff in Cook moved to consolidate the actions and to
appoint the law firm of Milberg Weiss as lead counsel for plaintiffs. On May 5,
2003, the defendants in the Cook action petitioned the Judicial Council to
coordinate the SDL actions with the OCLI action in Santa Clara County Superior
Court. On June 30, 2003, defendants in the Cook action petitioned to coordinate
the other SDL actions and the OCLI action with In re JDS Uniphase Corporation
Derivative Litigation.
On August 19, 2003, the court held a hearing on the motion to consolidate
and for appointment of lead counsel and the petitions to coordinate. The court
granted the motion to consolidate the SDL Actions with each other and appointed
the law firms of Milberg Weiss and Stull, Stull & Brody as lead counsel. The
court denied the petitions to coordinate the SDL Actions with the OCLI
Shareholder Action or with In re JDS Uniphase Corporation Derivative Litigation.
On August 21, 2003, the court scheduled a case management conference for
November 25, 2003.
The Company believes that the factual allegations and circumstances
underlying these securities class actions, derivative actions, and the OCLI and
SDL actions are without merit. The costs of defending these lawsuits has been
costly, will continue to be costly, and 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 prove to be time consuming and disruptive to
normal business operations. There can be no assurance that the Company will
prevail or that the cost of defending these lawsuits will be covered by its
insurance policies. An unfavorable outcome or settlement of this litigation
could have a material adverse effect on the Company's financial position,
liquidity or results of operations.
C-92
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, liquidity, or results of operations.
Note 9. 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 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. 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 February 2003, the Company amended and restated its Stockholder Rights
Agreement and currently each share of the Company's outstanding common stock is
associated with one right. Each right entitles stockholders to purchase
1/100,000 share of the Company's Series B Preferred Stock at an exercise price
of $21. 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 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 Company's Board of Directors, may be exchanged for either
1/100,000 share of Series B Preferred Stock or one share of common stock per
right. The rights expire on June 22, 2013.
The Company's Board of Directors has the authority to issue up to 499,999
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 the Company's 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 the Company's Board of Directors,
under some circumstances, could have the effect of delaying, deferring or
preventing a change in control.
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.
C-93
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 2003, the Company has reserved 203.7 million shares of
common stock for future issuance 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. Available for grant as of June 30, 2003 were 83.4 million shares
of common stock. 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.
The following table summarizes the Company's option activity through June
30, 2003 (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, 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
Increase in authorized shares 7,226 -- --
Granted (26,108) 26,108 2.63
Canceled 26,033 (30,734) 21.91
Exercised -- (4,081) 1.39
Expired 8,688 (23,603) 35.34
------- -------
Balance as of June 30, 2003 83,445 120,264 21.12
======= =======
Options exercisable as of:
June 30, 2001 52,864 $ 21.66
June 30, 2002 64,412 29.34
June 30, 2003 70,060 27.24
C-94
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes information about options outstanding as of
June 30, 2003 (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted-Average
Remaining
Number Contractual Life Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$ 0.00- 0.03 373 0.8 $ 0.00 372 $ 0.00
0.04- 0.04 119 5.5 0.04 118 0.04
0.24- 0.35 109 1.2 0.32 109 0.32
0.39- 0.39 6 1.3 0.39 6 0.39
0.60- 0.86 2,016 3.1 0.78 2,016 0.78
0.95- 1.39 1,246 3.7 1.19 1,246 1.19
1.45- 2.14 3,453 5.3 1.88 1,734 1.64
2.18- 3.27 19,702 7.3 2.75 561 2.85
3.28- 4.82 18,288 6.1 3.87 7,321 3.98
4.98- 7.37 7,063 3.6 6.59 6,692 6.60
7.50- 11.19 12,695 5.8 8.93 6,177 9.03
11.29- 16.93 13,611 4.6 14.96 8,947 15.23
16.94- 24.63 17,957 4.0 20.68 16,173 20.76
25.63- 36.41 4,618 5.7 29.48 4,097 29.10
38.50- 57.31 4,590 5.3 50.71 3,602 51.00
58.56- 87.63 7,590 6.0 70.16 5,449 69.99
88.00-131.81 6,687 4.6 112.12 5,316 112.57
132.31-146.53 141 3.0 138.24 124 138.31
------ ------
120,264 70,060
======= ======
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, 6.7 million,
2.6 million and 0.7 million shares were issued during fiscal 2003, 2002 and
2001, respectively, with weighted-average prices of $2.02, $6.74 and $23.54 per
share, respectively. Of the 50.0 million shares authorized to be issued under
the 98 Purchase Plan, 39.2 million shares remained available for issuance as of
June 30, 2003.
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, 0.9 million, 1.0 million and 0.3 million shares were issued during fiscal
2003, 2002 and 2001, respectively, with weighted-average prices of $2.15, $7.01
and $34.09 per share, respectively. Of the 10.0 million shares authorized to be
issued under the Canadian Plan, 7.8 million shares remained available for
issuance as of June 30, 2003.
C-95
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 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 vesting schedule of
the awards. Amortization of the deferred stock-based compensation was $47.9
million, $117.9 million and $52.6 million in fiscal 2003, 2002 and 2001,
respectively.
During fiscal 2003 and 2002, the Company reversed $4.7 million and $12.0
million, respectively, 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.
During fiscal 2003, in connection with the severance agreements of former
executives, the Company extended the exercise period for options to purchase
11.0 million shares at prices ranging from $0.70 to $112.63. No compensation
expense was recorded on these options.
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
2003, 2002, and 2001 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 2003 FY 2002 FY 2001 FY 2003 FY 2002 FY 2001
------- ------- ------- ------- ------- -------
Expected life (in years) 5.00 5.00 5.00 0.50 0.50 0.50
Volatility 0.80 0.79 0.78 0.79 0.79 0.78
Risk-free interest rate 3.07% 4.30% 5.00% 1.69% 2.72% 5.70%
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 2003, 2002 and 2001 was $1.87, $4.13 and $26.81 per share, respectively.
The weighted-average exercise price of employee stock options
C-96
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
granted during fiscal 2003, 2002 and 2001 was $2.63, $6.14 and $34.34 per share,
respectively. The weighted-average fair value of shares granted under the
employee stock purchase plans during fiscal 2003, 2002 and 2001 was $0.88, $2.95
and $21.92 per share, respectively.
Note 10. Employee Benefit Plans
The Company sponsors the JDS Uniphase Corporation Employee 401(k)
Retirement Plan (the "401(k) Plan"), a Defined Contribution Plan under ERISA,
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 $12,000 in
calendar year 2003 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 $3,600 per employee
in calendar year 2003. 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 are made in cash and vest
immediately. The Company's matching contributions to the 401(k) Plan were $7.0
million in fiscal 2003, $9.5 million in fiscal 2002 and $3.2 million in fiscal
2001.
Note 11. Reduction of Goodwill
During fiscal 2003, the Company recorded $225.7 million of impairment
charges in accordance with SFAS No. 142. During fiscal 2002 and fiscal 2001, the
Company recorded $4,360.8 million and $49,699.5 million, respectively, of
impairment charges in accordance with SFAS No. 121.
Fiscal 2003 Charges:
On July 1, 2002, the Company adopted SFAS No. 142, under which goodwill is
reviewed for impairment annually, or more frequently if certain events or
changes in circumstances indicate that the carrying value may not be
recoverable. In addition, the Company was required to perform a transitional
impairment review related to the carrying value of goodwill as of July 1, 2002.
During the first quarter of fiscal 2003, the Company completed the transitional
impairment review related to the carrying value of goodwill as of July 1, 2002
and determined that there was no impairment beyond amounts previously recorded
as of that date.
As part of its quarterly review of financial results in the first quarter
of fiscal 2003, the Company noted indicators that the carrying value of its
goodwill may not be recoverable and performed an additional impairment review.
The impairment review was performed because of the prolonged economic downturn
affecting the Company's operations and revenue forecasts. As the Company
determined that the continued decline in market conditions within the Company's
industry was significant and prolonged, the Company evaluated the recoverability
of its goodwill in accordance with SFAS No. 142 during the first quarter of
fiscal 2003. The Company did not identify any impairment indicators during the
rest of fiscal 2003.
Under the first step of the interim SFAS No. 142 analysis, the fair value
of the reporting units was determined based on a combination of the income
approach, which estimates the fair value based on the future discounted cash
flows, and the market approach, which estimates the fair value based on
comparable market prices. Under the income approach, the Company assumed a cash
flow period of 5 years, long-term annual growth rates of 9% to 33%, a discount
rate of 12.5% and terminal value growth rates of 5% to 7%. Based on the first
step analysis, the Company determined that the carrying amount of three
reporting units within the Communications Products Group was in excess of their
fair value. As such, the Company was required to perform the second step
analysis on the three reporting units that have failed the first step test to
determine the amount of the impairment loss. As of the filing of the Quarterly
Report on Form 10-Q for the first quarter of fiscal 2003, the Company had not
completed the second
C-97
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
step analysis due to the complexities involved in determining the implied fair
value of the goodwill of each reporting unit. However, the Company determined
that an impairment loss was probable and could be reasonably estimated.
Therefore, as permitted by SFAS No. 142, the Company recorded an estimated
impairment charge of $224.4 million to reduce the carrying value of its goodwill
in the first quarter of fiscal 2003.
During the second quarter of fiscal 2003, the Company completed the second
step analysis in connection with the impairment review for the first quarter of
fiscal 2003 and recorded an additional impairment charge of $1.3 million, as the
actual impairment charge was determined to be higher than the estimated charge
recorded in the first quarter of fiscal 2003.
During the fourth quarter of fiscal 2003, the Company completed the annual
impairment review related to the carrying value of goodwill as of June 30, 2003
and determined that there was no impairment beyond amounts previously recorded
as of that date.
The following table summarizes the impairment charges recorded during
fiscal 2003 (in millions):
Reporting Units
Communications Products Group:
Active Components $ 54.6
Optical Layer 28.7
Transmission 142.4
------
Total $225.7
======
Fiscal 2002 Charges:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002 (see Note 13), the Company restructured 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 determined to be $0, and recorded total
charges of $31.2 million related to goodwill.
As part of its quarterly reviews of financial results, the Company noted
indicators in the second, third and fourth quarters of fiscal 2002 that the
carrying value of its goodwill may not be recoverable and performed an
impairment review. The impairment review was performed pursuant to SFAS No. 121
because of the prolonged economic downturn affecting the Company's operations
and revenue forecasts. As a result of the prolonged economic downturn, the
Company's projected future revenue and cash flows for certain of the Company's
asset groupings were revised downward in the second, third and fourth quarters
of fiscal 2002. Therefore, the Company recorded charges to reduce goodwill 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.
The following table summarizes the write-downs of goodwill for the second
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
OCLI $ 514.1 5%-60%
SDL 751.0 15%-60%
--------
Total $1,265.1
========
The Company assumed a cash flow period of 5 years, a discount rate of 14%,
and terminal growth rates of 5% to 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing the
Company's estimated growth in the period of industry recovery, and a reduced
growth rate in the later years.
C-98
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the write-downs of goodwill for the third
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
E-TEK $ 697.5 30%-35%
JDS FITEL 1,184.7 30%-42%
OCLI 20.3 4%-13%
SDL 762.5 27%-50%
Other 206.5 7%-45%
--------
Total $2,871.5
========
The Company assumed a cash flow period of 5 years, a discount rate of 14%,
and terminal growth rates of 5% to 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing the
Company's estimated growth in the period of industry recovery, which decreases
in the later years.
The following table summarizes the write-downs of goodwill for the fourth
quarter of fiscal 2002 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ---------------
Epitaxx $130.8 25%-40%
SDL 43.5 15%-50%
UNL 18.7 25%-50%
------
Total $193.0
======
The Company assumed a cash flow period of 5 years, a discount rate of 14%,
and terminal growth rates of 7%. The long-term annual growth rates are higher in
the early years of the 5-year cash flow period, representing the Company's
estimated growth in the period of industry recovery, which decreases in the
later years.
Fiscal 2001 Charges:
As a result of the Phase 1 restructuring activities in the fourth quarter
of fiscal 2001, the Company restructured certain of its businesses and realigned
its operations to focus on more attractive 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 determined to be $0,
and recorded total charges of $3,075.4 million related to goodwill.
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 its operations and expected future sales.
As the Company determined that the continued decline in market conditions within
its 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.
The following table summarizes the write-downs of goodwill for the third
quarter of fiscal 2001 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- -------------- ----------------
ETEK $ 7,669.6 15%-40%
SDL 29,214.4 15%-40%
EPD 2,397.3 15%-40%
Other 495.9 15%-40%
---------
Total $39,777.2
=========
C-99
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company assumed a cash flow period of 5 years, a discount rate of 13%,
and terminal growth rate of 7%. The long-term annual growth rates are higher in
the early years of the 5-year cash flow period, representing the Company's
estimated growth in the period of industry recovery, and a reduced growth rate
in the later years.
The following table summarizes the write-downs of goodwill for the fourth
quarter of fiscal 2001 (in millions):
Reductions of Long-Term Annual
Acquired Entities Goodwill Growth Rate
- ----------------- ------------- ----------------
E-TEK $3,353.9 15%-60%
OCLI 1,012.7 15%-60%
SDL 2,480.3 15%-60%
--------
Total $6,846.9
========
The Company assumed a cash flow period of 5 years, a discount rate of
14.5%, and terminal growth rate of 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing the
Company's estimated growth in the period of industry recovery, which decreases
in the later years.
Note 12. Reduction of Other Long-Lived Assets
During fiscal 2003, the Company recorded $167.9 million of reductions in
the carrying value of its long-lived assets in accordance with SFAS No. 144.
During fiscal 2002 and fiscal 2001, the Company recorded $1,618.6 million and
$385.5 million, respectively, of reductions in the carrying value of its
long-lived assets in accordance with SFAS No. 121. These charges excluded asset
write-downs associated with the Global Realignment Program (see Note 13). The
following table summarizes the components of the reductions of other long-lived
assets (in millions):
Years Ended June 30,
------------------------------------
2003 2002 2001
------ -------- ------
Assets held and used:
Purchased intangibles (other than goodwill) $ 68.6 $1,243.1 $375.3
Property, plant and equipment 79.1 375.5 10.2
Assets held for sale:
Property, plant and equipment 20.2 -- --
------ -------- ------
Total reductions of other long-lived assets $167.9 $1,618.6 $385.5
====== ======== ======
Fiscal 2003 Charges:
Assets Held and Used:
On July 1, 2002, the Company adopted SFAS No. 144, under which long-lived
assets other than goodwill are tested for recoverability if certain events or
changes in circumstances indicate that the carrying value may not be
recoverable. The Company noted indicators during the first quarter of fiscal
2003 that the carrying value of its long-lived assets, including purchased
intangibles recorded in connection with its various acquisitions and property,
plant and equipment, may not be recoverable and performed an impairment review.
The impairment review was performed pursuant to SFAS No. 144 because of the
prolonged economic downturn affecting the Company's operations and revenue
forecasts. As a result of the prolonged economic downturn, the Company's
projected future revenue and cash flows for certain of the Company's asset
groupings were revised downward in the first quarter of fiscal 2003. Therefore,
the Company evaluated the recoverability of its long-lived assets and recorded
impairment charges based on the amounts by which the carrying amounts of these
assets exceeded their fair value. For purchased intangibles, fair value was
determined based on discounted future cash flows for the operating entities that
had separately identifiable cash flows. For tangible fixed assets, the Company
valued these assets that were subject to impairment using specific appraisals.
C-100
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the write-downs of purchased intangibles and
property, plant and equipment by acquisition for the first quarter of fiscal
2003 (in millions):
Purchased Property, Plant and
Acquired Entities Intangibles Equipment
- ----------------- ----------- -------------------
Datacom $39.1 $15.6
Epitaxx 19.9 26.3
SDL -- 24.3
Scion 8.9 12.9
Other 0.7 --
----- -----
Total $68.6 $79.1
===== =====
During the rest of fiscal 2003, the Company noted no impairment indicators
in connection with its long-lived assets held and used, and accordingly, a test
of recoverability of its long-lived assets was not required.
Assets Held for Sale:
During the third quarter and fourth quarter of fiscal 2003, the Company
classified certain property, plant and equipment intended to be disposed of
within a twelve month period as assets held for sale. In accordance with SFAS
No. 144, the Company recorded an impairment charge of $13.3 million,
representing the amount by which their carrying value exceeds fair value less
cost to sell. During the first quarter of fiscal 2003, the Company classified
certain property and equipment as assets held for sale in connection with the
sales of its SIFAM and Cronos subsidiaries (see Note 18) and recorded total
impairment charges of $6.9 million.
Fiscal 2002 Charges:
As a result of the Phase 2 restructuring activities in the first quarter of
fiscal 2002 (see Note 13), the Company restructured 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 determined to be $0, and recorded total
charges of $10.8 million related to purchased intangibles other than goodwill.
As part of its quarterly reviews of financial results, the Company noted
indicators in the second, third and fourth quarters of fiscal 2002 that the
carrying value of its long-lived assets, including significant amounts of
purchased intangibles recorded in connection with its various acquisitions, may
not be recoverable and performed an impairment review. The impairment review was
performed pursuant to SFAS No. 121 because of the prolonged economic downturn
affecting the Company's operations and revenue forecasts. As a result of the
prolonged economic downturn, the Company's projected future revenue and cash
flows for certain of the Company's asset groupings were revised downward in the
second, third and fourth quarters of fiscal 2002. Therefore, the Company
recorded charges to reduce its 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.
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles, for the second quarter of fiscal 2002 (in
millions):
Purchased Long-Term Annual
Acquired Entity Intangibles Growth Rate
- --------------- ----------- ----------------
SDL $2.5 15%-60%
C-101
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company assumed a cash flow period of 5 years, a discount rate of 14%,
and terminal growth rates of 5% to 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing the
Company's estimated growth in the period of industry recovery, and a reduced
growth rate in the later years.
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
third quarter of fiscal 2002 (in millions):
Purchased Property, Plant Long-Term Annual
Acquired Entities Intangibles and Equipment Growth Rate
- ----------------- ----------- --------------- ----------------
E-TEK $224.1 $ 1.1 30%-35%
JDS FITEL 233.9 -- 30%-42%
OCLI 210.7 67.2 4%-13%
SDL 247.6 10.4 27%-50%
Other 9.0 8.6 7%-45%
------ -----
Total $925.3 $87.3
------ -----
The Company assumed a cash flow period of 5 years, a discount rate of 14%,
and terminal growth rates of 5% to 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing our
estimated growth in the period of industry recovery, and a reduced growth rate
in the later years.
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
fourth quarter of fiscal 2002 (in millions):
Purchased Property, Plant Long-Term Annual
Acquired Entities Intangibles and Equipment Growth Rate
- ----------------- ----------- --------------- ---------------
E-TEK $ -- $ 63.2 22%-45%
JDS FITEL 132.5 90.7 17%
SDL 165.2 61.7 15%-50%
Other 6.8 72.6 7%-50%
------ ------
Total $304.5 $288.2
====== ======
The Company assumed a cash flow period of 1-5 years, a discount rate of
14%, and terminal growth rate of 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing our
estimated growth in the period of industry recovery, and a reduced growth rate
in the later years.
Fiscal 2001 Charges:
As a result of the Phase 1 restructuring activities in the first quarter of
fiscal 2001 (see Note 13), the Company restructured 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 determined to be $0, and recorded total
charges of $298.1 million related to purchased intangibles other than goodwill.
As part of its quarterly reviews of financial results, the Company noted
indicators in the third and fourth quarters of fiscal 2001 that the carrying
value of its long-lived assets, including significant amounts of purchased
intangibles recorded in connection with its various acquisitions, may not be
recoverable and performed an impairment review. The impairment review was
performed pursuant to SFAS No. 121 because of the prolonged economic downturn
affecting the Company's operations and revenue forecasts. As a result of the
prolonged economic downturn, the Company's projected future revenue and cash
flows for certain of the Company's asset groupings were revised downward in the
fourth quarter of fiscal 2001. Therefore, the Company recorded charges to reduce
its 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.
C-102
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the write-downs of its long-lived assets,
consisting of purchased intangibles and property, plant and equipment, for the
fourth quarter of fiscal 2001 (in millions):
Purchased Property, Plant Long-Term Annual
Acquired Entities Intangibles and Equipment Growth Rate
- ----------------- ----------- --------------- ----------------
OCLI $77.2 $ 8.6 15%-60%
SDL -- 1.6 15%-60%
----- -----
Total $77.2 $10.2
===== =====
The Company assumed a cash flow period of 5 years, a discount rate of
14.5%, and terminal growth rate of 7%. The long-term annual growth rates are
higher in the early years of the 5-year cash flow period, representing our
estimated growth in the period of industry recovery, and a reduced growth rate
in the later years.
Note 13. Global Realignment Program Charges
Overview:
In April 2001, the Company initiated the Global Realignment Program, under
which it began restructuring its business in response to the economic downturn.
Through the end of fiscal 2003, the Company implemented 7 phases of
restructuring activities and recorded total restructuring charges of $645.6
million. In addition, the Company incurred charges other than restructuring of
$474.9 million related to the Global Realignment Program. Restructuring
activities initiated prior to December 31, 2002 were recorded in accordance with
EITF No. 94-3, and restructuring activities initiated after December 31, 2002
were recorded in accordance with SFAS No. 146 (see Note 1) and SFAS No. 112,
"Employers' Accounting for Post employment Benefits."
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
and buildings closed or scheduled for closure is 29. Based on the decisions made
through the end of fiscal 2003, the Company will reduce its total workforce by
approximately 19,630 employees upon the completion of the Global Realignment
Program. As of June 30, 2003, 19,347 employees have been terminated.
Phases 1 through 3 Restructuring Activities:
The Company implemented its Phase 1 through 3 restructuring activities
during the fourth quarter of fiscal 2001 through the fourth quarter of 2002. The
following table summarizes the restructuring charges under these phases from
inception through the end of fiscal 2003 (in millions):
C-103
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Workforce Facilities and
Reduction Equipment Lease Costs Total
--------- -------------- ----------- --------
Initial 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)
------ ------- ------ -------
Accrual balance as of June 30, 2001 43.1 -- 62.1 105.2
Initial restructuring charges -- Phase 2 55.8 141.3 45.9 243.0
Initial restructuring charges -- Phase 3 26.7 10.4 4.9 42.0
Cash payments (90.5) -- (30.6) (121.1)
Adjustments (15.5) 2.2 (6.1) (19.4)
Cash proceeds in excess of salvage value -- (5.6) -- (5.6)
Non-cash charges -- (148.3) -- (148.3)
------ ------- ------ -------
Accrual balance as of June 30, 2002 19.6 -- 76.2 95.8
Cash payments (14.4) -- (19.3) (33.7)
Adjustments (1.5) 9.2 8.0 15.7
Cash proceeds in excess of salvage value -- (2.8) -- (2.8)
Non-cash charges (1.2) (6.4) 0.4 (7.2)
------ ------- ------ -------
Accrual balance as of June 30, 2003 $ 2.5 $ -- $ 65.3 $ 67.8
====== ======= ====== =======
In conection with the Phase 1 through 3 restructuring activities,
management with the appropriate level of authority approved and committed the
Company to plans to close 24 sites, vacate buildings at the closed sites as well
as at other continuing operations, and reduce its workforce by approximately
15,700 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,
Taipei, Taiwan, Arnhem, Netherlands; Gloucester, Massachusetts; Manteca,
California; Plymouth, United Kingdom; Victoria, British Columbia; Witham, United
Kingdom; two sites in Ottawa, Ontario; Columbus, Ohio; Eatontown, New Jersey;
San Jose, California; Sydney, Australia; Toronto, Ontario; Torquay, United
Kingdom; and Waghaeusel-Kirrlach, Germany.
Workforce Reduction:
In connection with the Phase 1 through 3 restructuring activities, the
Company recorded total initial charges of $161.6 million primarily related to
severance and fringe benefits associated with the reduction of approximately
15,700 employees, which includes non-cash severance charges of $11.1 million
related to the modification of a former executive's stock options. During the
fiscal periods 2002 and 2003, the Company recorded decreases of $15.5 million
and $1.5 million respectively to the accrual balance, as the actual amounts paid
for such charges were lower than originally estimated.
Approximately 13,600 employees were engaged in manufacturing, 900 in
research and development, and 1,200 in selling, general and administrative
functions. Approximately 13,250 employees were located in North America, 1,400
in Europe, and 1,050 in Asia-Pacific. The Company has substantially completed
its Phase 1 through 3 workforce reductions. The remaining accrual balance
reflects severance and benefit payments scheduled to be paid in the first
quarter of fiscal 2004.
Facilities and Equipment and Lease Costs:
In connection with the Phases 1 through 3 restructuring activities,
property and equipment that were disposed of or removed from operations resulted
in an initial charge of $273.9 million, of which $229.2 million was related to
the Communications Products Group, $41.2 million was related to the Thin Film
Products Group and $3.5 million was related to the "All Other" category for
segment reporting purposes (see Note 17). The property and equipment write-downs
consisted primarily of owned buildings, leasehold improvements, computer
equipment and related
C-104
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
software, production and engineering equipment, and office equipment, furniture
and fixtures. During fiscal 2002 and 2003, the Company recorded total
adjustments of $2.2 million and $9.2 million, respectively, primarily due to
additional declines in the fair market value of owned buildings held for
disposal. In addition, during fiscal 2002 and 2003, the Company received $5.6
million and $2.8 million, respectively, of cash proceeds in excess of the
estimated salvage value of certain restructured assets sold.
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 twelve 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 2003. 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.
In connection with the Phases 1 through 3 restructuring activities, the
Company incurred charges of $113.8 million for exiting and terminating leases
primarily related to excess or closed facilities with planned future 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 $6.1
million to the accrual balance and negotiated subleases and termination
agreements. During fiscal 2003, the Company recorded an increase of $8.0 million
to the accrual balance primarily due to changes in real estate market
conditions. The Company anticipates that it will take approximately 12 to 27
months to sublease the remaining vacated properties. Amounts related to the
lease expense, net of anticipated sublease proceeds, will be paid over the
respective lease terms through fiscal 2013.
Phase 4 Restructuring Activities:
The Company implemented its Phase 4 restructuring activities during the
first quarter of fiscal 2003. The following table summarizes the Company's Phase
4 restructuring charges from inception through the end of fiscal 2003 (in
millions):
Workforce
Reduction Lease Costs Total
--------- ----------- -------
Initial restructuring charges -- Phase 4 $ 20.5 $ 7.2 $ 27.7
Cash payments (18.4) (0.8) (19.2)
Adjustments (1.6) 0.2 (1.4)
------ ----- ------
Accrual balance as of June 30, 2003 $ 0.5 $ 6.6 $ 7.1
====== ===== ======
In connection with the Phase 4 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to close two sites, vacate buildings at the closed sites as well as at other
continuing operations and reduce its workforce by approximately 1,150 employees.
The closed sites were located in Raleigh, North Carolina and San Jose,
California. The San Jose, California site is related to the E-TEK operations,
which are to be relocated to the Company's other sites located in West Trenton,
New Jersey and Shenzhen, China. The Company's San Jose headquarters will
continue to occupy a portion of the E-TEK site.
Workforce Reduction:
In connection with the Phase 4 restructuring activities, the Company
recorded total charges of $20.5 million primarily related to severance and
fringe benefits associated with the reduction of approximately 1,150 employees.
Approximately 800 employees were engaged in manufacturing, 250 in research and
development, and 100 in selling, general and administrative functions. All
employees were located in North America. During 2003, an adjustment of $1.6
million was recorded due to lower than expected cash payments. As of June 30,
2003, the Company has substantially completed its Phase 4 workforce reductions
and expects to complete its Phase 4 workforce reduction by the end of the first
quarter of fiscal 2004.
C-105
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Lease Costs:
In connection with the Phase 4 restructuring activities, the Company
accrued total charges of $7.2 million for exiting and terminating leases
primarily related to excess or closed facilities with planned future 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 2003, the Company recorded an increase of $0.2 million
to the accrual balance primarily due to changes in real estate market
conditions. The Company anticipates that it will take approximately 10 months to
sublease the remaining vacated properties. Amounts related to the lease expense,
net of anticipated sublease proceeds, will be paid over the respective lease
terms through fiscal 2016.
Phase 5 Restructuring Activities:
The Company implemented its Phase 5 restructuring activities during the
second quarter of fiscal 2003. The following table summarizes the Company's
Phase 5 restructuring charges from inception through the end of fiscal 2003 (in
millions):
Workforce Facilities and
Reduction Equipment Lease Costs Total
--------- -------------- ----------- -------
Initial restructuring charges -- Phase 5 $ 35.5 $ 0.5 $30.0 $ 66.0
Cash payments (23.4) -- (0.5) (23.9)
Non-cash charges -- (0.5) -- (0.5)
Adjustments 5.7 -- 4.8 10.5
------ ----- ----- ------
Accrual balance as of June 30, 2003 $ 17.8 $ -- $34.3 $ 52.1
====== ===== ===== ======
In connection with the Phase 5 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to close one site, located in Eindhoven, Netherlands, vacate buildings at the
closed site as well as at other continuing operations and reduce its workforce
by approximately 1,700 employees.
Workforce Reduction:
In connection with the Phase 5 restructuring activities, the Company
recorded total charges of $35.5 million primarily related to severance and
fringe benefits associated with the reduction of approximately 1,700 employees.
Approximately 1,400 employees were engaged in manufacturing, 100 in research and
development, and 200 in selling, general and administrative functions.
Approximately 1,400 employees were located in North America and 300 employees in
Europe. During 2003, the Company increased its estimate of costs related to the
workforce reduction by $5.7 million as a result of higher expected cash
payments. As of June 30, 2003, 1,539 employees have been terminated. The Company
expects to complete its Phase 5 workforce reduction by the end of fiscal 2004.
Facilities and Equipment and Lease Costs:
In connection with the Phase 5 restructuring activities, property and
equipment that were disposed of or removed from operations resulted in total
charges of $0.5 million related to the Communications Products Group. 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 fiscal
2004.
In connection with the Phase 5 restructuring activities, the Company
accrued total charges of $30.0 million for exiting and terminating leases
primarily related to excess or closed facilities with planned future 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 the third and fourth quarters of 2003, the Company recorded
an increase of $4.8 million to the accrual balance primarily due to changes in
real estate market conditions, which
C-106
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
resulted in changes regarding estimated vacancy duration and sublease income.
The Company anticipates that it will take approximately 9 to 52 months to
sublease the remaining vacated properties. Amounts related to the lease expense,
net of anticipated sublease proceeds, will be paid over the respective lease
terms through fiscal 2021.
Phase 6 Restructuring Activities:
The Company implemented its Phase 6 restructuring activities during the
third quarter of fiscal 2003. The following table summarizes the Company's Phase
6 restructuring charges from inception through the end of fiscal 2003 (in
millions):
Workforce
Reduction
---------
Initial restructuring charges -- Phase 6 $ 5.0
Additional restructuring charges -- Phase 6 1.1
Cash payments (3.6)
-----
Accrual balance as of June 30, 2003 $ 2.5
=====
Workforce Reduction:
In connection with the Phase 6 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to reduce its workforce by approximately 260 employees. The Company recorded
total charges of $6.1 million primarily related to severance and fringe benefits
associated with the workforce reductions. Additional restructuring charges were
included in the fourth quarter of fiscal 2003, for approximately 20 employees,
which were notified in that quarter. The severance and fringe benefit accrual
was accounted for under SFAS No. 112.
Approximately 200 employees were engaged in manufacturing, 50 in research
and development, and 10 in selling, general and administrative functions. All
employees were located in North America. As of June 30, 2003, approximately 180
employees have been terminated. The Company expects to complete its Phase 6
workforce reduction by the end of the third quarter of fiscal 2004.
Phase 7 Restructuring Activities:
The Company implemented its Phase 7 restructuring activities during the
fourth quarter of fiscal 2003. The following table summarizes the Company's
Phase 7 restructuring charges (in millions):
Workforce
Reduction Lease Costs Total
----------- ------------- ---------
Initial restructuring charges -- Phase 7 $ 2.4 $ 2.7 $ 5.1
Cash payments (0.3) (0.2) (0.5)
----- ----- -----
Accrual balance as of June 30, 2003 $ 2.1 $ 2.5 $ 4.6
===== ===== =====
Workforce Reduction:
In connection with the Phase 7 restructuring activities, management with
the appropriate level of authority approved and committed the Company to plans
to reduce its workforce by approximately 70 employees. The Company recorded
total charges of $2.4 million primarily related to severance and fringe benefits
associated with the workforce reductions.
Approximately 20 employees were engaged in manufacturing, 20 in research
and development, and 30 in selling, general and administrative functions. All
employees were located in North America. As of June 30, 2003,
C-107
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
approximately 28 employees have been terminated. The Company expects to complete
its Phase 7 workforce reduction by the end of the second quarter of fiscal 2004.
Facility and Lease Costs:
In connection with the Phase 7 restructuring activities, the Company
accrued total charges of $2.7 million for exiting lease related to one closed
facility, located in San Jose, California. The Company estimated the cost of the
facility lease based on the contractual terms of the agreements and real estate
market conditions. The Company anticipates that it will take approximately 15
months to sublease the property. Amounts related to the lease expense, net of
anticipated sublease proceeds, will be paid over the respective lease terms
through fiscal 2006. The lease costs accrual was accounted for under SFAS No.
146.
Charges Other Than Restructuring:
In addition to the charges recorded in connection with the restructuring
activities, the Company incurred total other charges of $474.9 million related
to the Global Realignment Program. Details of these charges were as follows (in
millions):
Years Ended June 30,
---------------------------------
2003 2002 2001
------- -------- --------
Property and equipment $36.3 $164.7 $ 6.4
Inventories -- -- 173.5
Purchase commitments and other obligations (2.5) (7.4) 55.6
Workforce-related charges 14.7 12.3 0.2
Lease costs 5.5 6.4 --
Moving and other costs 1.7 6.7 0.8
----- ------ ------
Total other charges $55.7 $182.7 $236.5
===== ====== ======
During fiscal 2003, 2002 and 2001, the Company recorded $36.3 million,
$164.7 million and $6.4 million, respectively, of additional depreciation from
changes in the estimated useful life and the write-downs of certain property and
equipment that were identified for disposal but remained in use until the date
of disposal. 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.
Cash proceeds totaled $3.2 million in fiscal 2003.
During fiscal 2001, the Company recorded charges associated with 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 2003 and 2002, the Company
recorded decreases of $2.5 million and $7.4 million, respectively, to the
accrual balance, as the actual amounts paid to settle certain commitments and
other obligations were lower than originally estimated.
During fiscal 2003, 2002 and 2001, the Company recorded workforce-related
charges of $14.7 million, $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 incurred in fiscal 2002 were 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 employees were
located in North America, 100 in Europe and 500 in Asia-Pacific. All 750
employees have been terminated and severance and benefit payments related to
these employees have been paid in full.
During fiscal 2002, the Company announced the closure of one site at
Piscataway, New Jersey. Lease costs of $6.4 million were primarily related to
exiting and terminating building leases at this site. The Company estimated the
cost of exiting and terminating the facility leases based on the contractual
terms of the agreements and the real
C-108
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
estate market conditions. The Company anticipates that it will take
approximately 16 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 2003, the Company
recorded additional lease charges of $5.5 million due primarily to the loss of a
sub-tenant in a building in San Jose, California, not required for ongoing
operations.
During fiscal 2003, 2002 and 2001, the Company incurred moving and other
costs of $1.7 million, $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 of or planned to dispose of.
Charges other than restructuring were recorded in the Company's
Consolidated Statements of Operations as follows (in millions):
Years Ended June 30,
--------------------------------
2003 2002 2001
------ -------- --------
Cost of sales $ 7.7 $124.6 $220.7
Research and development 2.7 8.2 2.9
Selling, general and administrative 45.3 49.9 12.9
----- ------ ------
Total other charges $55.7 $182.7 $236.5
===== ====== ======
As of June 30, 2003, the accrual balance related to these charges was $7.5
million, consisting primarily of purchase and lease commitments. 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 Company's 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 during the fourth quarter of fiscal 2002 that had
previously been removed from operations and fully depreciated or written down
under the Global Realignment Program. These assets were 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 Communications Products
Group, $10.7 million was related to the Thin Film Products Group and $1.1
million was related to the "All Other" category for segment reporting purposes
(see Note 17). During fiscal 2003 $2.8 million, of these recommissioned assets
have been sold, scraped or made available for sale. The recommissioned property
and equipment were put back into use with a carrying value of $0 during the
fourth quarter of fiscal 2002. Based on the dates these assets were placed back
into service and taking into consideration the potential impact of the
impairment loss on these assets, the Company would have incurred additional
depreciation expense of approximately $4.2 million and $1.5 million for fiscal
2003 and 2002, respectively.
C-109
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 14. Income Taxes
The Company's income tax expense (benefit) consisted of the following (in
millions):
Years Ended 30,
-------------------------------------
2003 2002 2001
--------- ----------- -----------
Federal:
Current $ -- $ (35.8) $ (86.4)
Deferred (6.1) 462.8 (226.6)
(6.1) 427.0 (313.0)
------ ------- -------
State:
Current -- -- 23.0
Deferred (0.9) 65.9 (32.4)
(0.9) 65.9 (9.4)
------ ------- -------
Foreign:
Current (47.5) (68.0) 80.9
Deferred 68.0 (187.6) (130.4)
------ ------- -------
20.5 (255.6) (49.5)
Total income tax expense (benefit) $ 13.5 $ 237.3 $(371.9)
====== ======= =======
There is no tax benefit associated with exercises of stock options for the
fiscal year ended June 30,2003. The tax benefit associated with exercises of
stock options resulted in tax refunds of $23.0 million in fiscal year ended June
30, 2002 and reduced taxes currently payable by $142.7 million in fiscal year
ended June 30, 2001.
The Company's loss before income taxes consisted of the following (in
millions):
Years Ended 30,
-----------------------------------------
2003 2002 2001
-------- ---------- ----------
Domestic $(703.0) $(8,099.4) $(56,544.0)
Foreign (217.3) (401.6) 50.2
------ -------- ---------
Total loss before income taxes $(920.3) $(8,501.0) $(56,493.8)
======= ========= ==========
A reconciliation of the Company's income tax expense at the federal
statutory rate to the income tax expense (benefit) at the effective tax rate is
as follows (in millions):
Years Ended 30,
--------------------------------------
2003 2002 2001
------- -------- --------
Income tax expense computed at federal statutory rate $(322.1) $(2,975.3) $(19,772.9)
State taxes, net of federal benefit -- 42.8 (6.1)
Non-deductible acquired in-process research & development -- -- 137.6
Reduction of goodwill 79.0 1,442.9 17,515.3
Non-deductible amortization 3.8 428.3 1,688.7
Income tax expense from net earnings of foreign subsidiary
considered to be permanently invested in non-U.S. operations -- -- 10.1
Valuation allowance 250.8 1,315.4 51.2
Tax exempt income -- (9.1) (10.6)
Gain on sale of foreign subsidiary -- -- 10.9
Other 2.0 (7.7) 3.9
------- --------- ----------
Income tax expense (benefit) $ 13.5 $ 237.3 $ (371.9)
======= ========= ==========
C-110
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The components of the Company's net deferred taxes consisted of the
following (in millions):
June 30,
-----------------------------
2003 2002
------------- -------------
Gross deferred tax assets:
Tax credit carryforwards $ 69.2 $ 49.2
Net operating loss carryforwards 1,539.4 1,240.7
Inventories 111.3 118.2
Accruals and reserves 92.4 144.5
Other 137.8 88.1
Acquisition-related items 576.3 741.5
--------- ---------
Gross deferred tax assets 2,526.4 2,382.2
Valuation allowance (2,489.5) (2,270.3)
--------- ---------
Deferred tax assets 36.9 111.9
Deferred tax liabilities:
Acquisition related items (27.6) (41.4)
Investment holdings (9.3) (2.2)
Other -- (0.3)
--------- ---------
Deferred tax liabilities (36.9) (43.9)
Total net deferred tax assets $ -- $ 68.0
========= =========
The valuation allowance increased by $219.2 million in fiscal 2003,
$1,274.3 million in fiscal 2002 and $420.6 million in fiscal 2001. Increases in
the valuation allowance for domestic deferred tax assets recorded in prior
periods 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. Due to the continued economic uncertainty in the
industry, the Company has recorded deferred tax assets as of June 30, 2003 only
to the extent of deferred tax liabilities. Refundable income taxes of $39.0
million were recorded as of June 30, 2003.
Approximately $476.2 million of the valuation allowance as of June 30, 2003
was attributable to stock option deductions, the benefit of which will be
credited to paid-in capital when and if realized. Approximately $55.4 million of
the valuation allowance as of June 30, 2003 was attributable to deferred tax
assets that when realized, will first reduce unamortized goodwill, the other
non-current intangible assets of acquired subsidiaries, and then income tax
expense.
Included in the $13.5 million provision for income taxes recorded for
fiscal year 2003 is an $18.0 million expense related to the prior financial
reporting period ended June 30, 2002 and resulted from an increase in the
Company's valuation allowance for deferred tax assets. During the fiscal year
ended 2003, Canadian tax authorities completed a review of the Company's pending
claims for refunds of prior-year income taxes. As a result of this review,
certain matters related to carryback periods and minimum taxes were identified
that caused the Company to conclude that it had recorded $18.0 million of net
deferred tax assets in excess of income taxes actually recoverable from prior
years and, therefore, necessitated the recording of an additional valuation
allowance for deferred tax assets. As of June 30, 2002, management concluded
that due to the existing economic environment, the Company should not record net
deferred tax assets in excess of recoverable income taxes. The $18.0 million
amount recorded in fiscal year 2003 was not material to the period in which it
should have been recorded nor material to the consolidated results of operations
for the year ending June 30, 2003. The impact on the net loss for the year ended
June 30, 2002 would have been an increase of $18.0 million, and the basic and
diluted net loss per share would have increased by $0.01 and the Company would
have restated the consolidated balance sheet as of June 30, 2002 by reducing the
net deferred income tax asset by $18.0 million. Net loss for the year ended June
30, 2003 would have decreased by $18.0 million, and the basic and diluted net
loss per share would have decreased by $0.01.
As of June 30, 2003, the Company had federal, state and foreign net
operating loss carryforwards of $3,977.5 million, $2,144.0 million and $117.5
million, respectively, and federal, state and foreign research and other tax
credit
C-111
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
carryforwards of $41.8 million, $22.2 million and $12.9 million, respectively.
The net operating loss and tax credit carryforwards will expire at various dates
between fiscal 2004 and 2023, if not utilized.
During fiscal 2003 the Company settled certain foreign tax examinations
relating to pre-acquisition periods of acquired subsidiaries. Approximately $5.5
million was recorded as an increase to goodwill in connection with the
settlements. The Company is currently subject to various federal, state and
foreign audits by taxing authorities. The Company believes that adequate amounts
have been provided for any adjustments that may result from these examinations.
Note 15. Related Party Transactions
Adept:
On October 22, 2001, the Company entered into an automation development
alliance agreement with Adept for optical component and module manufacturing
processes. Under the agreement, Adept agreed 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's convertible preferred
stock and the investment was accounted for under the cost method. During fiscal
2003, the Company determined that the decline in fair value of its Adept
investment was other-than-temporary and wrote the investment down to zero.
During the second quarter of fiscal 2003, the Company and Adept mutually
terminated the automation development alliance agreement. As a result of the
termination, Adept issued the Company a promissory note of $1.0 million to pay
off its outstanding obligation of the same amount to the Company. The promissory
note bears an interest rate of 7% per annum and is due and payable on September
30, 2004.
Innovance Networks:
As of June 30, 2003, the Company had a $0.3 million investment 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 during a portion of fiscal 2002. However,
Innovance was no longer a significant customer for fiscal 2003.
Furukawa Electric Co.:
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 decreased to below 10% and has not increased
above that level at any time during fiscal 2003. Furukawa does not have control
over and 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,
---------------------------- ------------------
2003 2002 2001 2003 2002
----- ----- ----- ------ ------
Net sales: Accounts Receivable:
Adept $ -- $ 3.0 $ -- Adept $1.0 $1.0
Innovance 1.8 13.6 0.9 Innovance 0.3 1.7
Furukawa -- 0.8 3.2 Furukawa -- --
C-112
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 16. Mergers and Acquisitions
Triquint:
On May 6, 2003, the Company acquired the undersea pump laser assets from
TriQuint Semiconductor, Inc ("TriQuint) for $6.6 million in cash. The
acquisition was consistent with the Company's strategy to provide higher levels
of integration in its pump lasers, and helps position the Company to be a
leading supplier of submarine pump modules. Direct transaction costs incurred in
connection with the acquisition were immaterial.
The purchase price allocation was as follows (in millions):
Net tangible assets acquired $1.0
Intangible assets acquired:
Developed Technology 1.0
Goodwill 4.6
----
Total purchase price $6.6
====
The developed technology is being amortized over its estimated useful life
of four years.
The acquisition was accounted for as a purchase transaction under SFAS No.
141, and accordingly, the tangibles assets acquired were recorded at their fair
value at the date of the acquisition. The results of operations of TriQuint 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 net tangible assets
acquired (in millions):
Inventories $ 0.4
Property, plant and equipment 0.6
-----
Total assets acquired 1.0
-----
Net tangible assets acquired $ 1.0
=====
Goodwill of $4.6 million has been assigned to the Communication Products
Group and is not expected to be deductible for tax purposes under Internal
Revenue Code 197.
L.A. Label:
On January 21, 2003, the Company acquired L.A. Label Corporation ("LAL "),
a supplier of pressure-sensitive labels for a variety of industrial and
commercial applications. The Company believes that the acquisition will expand
its capability to provide integrated optical technology solutions for product
security and brand authentication markets. The consideration consisted of $19.4
million in cash, of which $17.4 million has been paid to the former shareholders
of LAL. The Company has retained $2.0 million of the cash consideration for any
future liabilities the Company may incur resulting from any breach of general
representations or warranties made by the former shareholders of LAL. The
retained amount will be paid to the former shareholders of LAL eighteen months
after the acquisition date in the event no such breach of representations or
warranties exists. Direct transaction costs incurred in connection with the
acquisition were immaterial.
C-113
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The purchase price allocation was as follows (in millions):
Net tangible assets acquired $ 4.5
Intangible assets acquired:
Customer relationships 4.4
Trademark / tradename 2.9
Internal use software 0.5
Goodwill 7.1
-----
Total purchase price $19.4
=====
Intangible assets are being amortized over their estimated useful lives of
five years for customers relationship, ten years for trademark / tradename, and
five years for internal use software.
The acquisition was accounted for as a purchase transaction under SFAS No.
141, and accordingly, the tangibles assets acquired and liabilities assumed were
recorded at their fair value at the date of the acquisition. The results of
operations of LAL 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 net tangible assets
acquired (in millions):
Cash and cash equivalents $ 0.8
Accounts receivables and prepaid expenses 1.8
Inventories 0.5
Property, plant and equipment 2.2
Other assets 0.1
-----
Total assets acquired 5.4
-----
Accounts payable (0.3)
Long-term debt (0.2)
Other liabilities (0.4)
-----
Total liabilities assumed (0.9)
-----
Net tangible assets acquired $ 4.5
=====
Goodwill of $7.1 million has been assigned to the Thin Film Products Group
and is not expected to be deductible for tax purposes under Internal Revenue
Code 197.
OptronX:
On September 18, 2002, the Company completed the acquisition of the
transceiver/transponder business unit of OptronX. The Company believes that the
acquisition will extend its transmission product line in metro and short-reach
applications. The Company paid OptronX $6.2 million in cash. Direct transaction
costs incurred in connection with the acquisition were immaterial. In addition,
the Company may be required to make a contingent payment of up to $4.5 million
in cash based on the financial performance of the acquired business unit in
calendar year 2003. Any future payments to OptronX will be accounted for as
goodwill.
C-114
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The final purchase price allocation was as follows (in millions):
Net tangible liabilities assumed $(0.3)
Intangible assets acquired:
Existing technology 1.0
In-process research and development 0.4
Goodwill 5.1
-----
Total purchase price $ 6.2
=====
Existing technology is being amortized over its estimated useful lives of
three years.
The acquisition was accounted for as a purchase transaction in accordance
with SFAS No. 141, and accordingly, the assets acquired and liabilities assumed
were recorded at their estimated fair value at the date of the acquisition. The
results of operations of the transceiver/transponder unit 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 net tangible
liabilities assumed (in millions):
Accounts receivable $ 0.2
Inventories 0.8
Property and equipment 2.7
-----
Total assets acquired 3.7
-----
Accounts payable (0.8)
Loan payable (2.5)
Other (0.7)
-----
Total liabilities assumed (4.0)
-----
Net tangible liabilities assumed $(0.3)
=====
A portion of the purchase price has been allocated to existing technology
and acquired in-process research and development ("IPR&D"). They were identified
and valued through analysis of data provided by OptronX concerning developmental
products, their stage of development, the time and resources needed to complete
them, their expected income generating ability, target markets and associated
risks. The Income Approach was the primary technique used in valuing the
existing technology. The discount rate used was 20%.
Those developmental projects that had not reached technological feasibility
and had no future alternative uses were classified as IPR&D and expensed in the
first quarter of fiscal 2003. 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.
Goodwill of $5.1 million has been assigned to the Communications Products
Group and is expected to be deductible for tax purposes under Internal Revenue
Code 197.
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 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.
C-115
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 was settled with the former shareholders of Scion
for $1.6 million. At June 30, 2003, the Company has no remaining obligations to
the former shareholders of Scion.
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 development 3.2
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 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.
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
C-116
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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). At June 30, 2003, no future
payments were due IBM based on the financial performance of the optical
transceiver business. The Company incurred an estimated $6.3 million in direct
transaction costs and recorded total adjustments of $2.7 million as a result of
final valuation of the inventories acquired.
C-117
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
Adjustments to purchase price (2.7)
-------
Total purchase price $335.9
=======
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 212.2
------
Total purchase price $335.9
======
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 acquisition was accounted 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.
C-118
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
C-119
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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.
C-120
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 was amortizing the acquired existing technology of $455.4
million on a straight-line basis over an average estimated remaining useful life
of 5 years prior to the recording of impairment charges (see Note 12). 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 was amortizing the acquired core technology of $214.2
million on a straight-line basis over an average estimated remaining useful life
of 5 years prior to the recording of impairment charges (see Note 12).
The trademarks and tradenames include the SDL trademark and tradename. The
Company was amortizing the trademarks and trade names of $46.0 million on a
straight-line basis over an estimated remaining useful life of 5 years prior to
the recording of impairment charges (see Note 12).
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.
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 11).
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.
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
C-121
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
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 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 provided for
the issuance of additional shares of common stock with the final milestone
payment paid during fiscal 2003.
During fiscal 2003, Epion reached the final milestone that resulted in the
Company issuing 9.7 million shares of the Company's common stock valued at $30.0
million, of which $27 million was recorded as goodwill, $2.9 million was
recorded as expenses as a portion of the milestone required continued service to
the Company in order to be earned and $0.1 million was recorded as deferred
compensation related to unvested options. 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).
C-122
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Sale of Epion's assets:
During the fourth quarter of fiscal 2003, the Company completed the sale of
the majority of the Epion assets to Epion Corporation, a Delaware Corporation
("New Epion"). As part of the transaction, the Company received approximately
0.8 million preferred shares and 0.2 million warrants to purchase preferred
shares of New Epion valued at approximately $3.6 million. After adjusting for
the net costs of the assets sold, the Company realized a loss of $1.7 million
from the transaction.
Note 17. Operating Segments and Geographic Information
The Company evaluates its reportable segments in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." For
fiscal year 2003 the Company's Chief Executive Officer, Jozef Straus and
President and Chief Operating Officer, Syrus Madavi were the Company's Chief
Operating Decision Makers ("CODMs") pursuant to SFAS No. 131. The CODMs allocate
resources to the segments 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. As a
result of the Company's continuing efforts to restructure its operations under
the Global Realignment Program, the Company changed the structure of its
internal organization during the first quarter of fiscal 2003 and concluded that
it has two principal reportable segments. The two reportable segments are:
(i) Communications Products Group:
The Communications Products Group consists of the Company's communication
businesses, which provide fiberoptic components and modules for system
manufacturers in the telecommunications, data communications and cable
television industries.
(ii) Thin Film Products Group:
The Thin Film Products Group consists of the Company's non-communications
businesses and includes laser subsystems products and thin film products for
display, security, decorative, aerospace and defense applications.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on operating income (loss) excluding
infrequent or unusual items.
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, non-operating income and expenses or specifically
identifiable assets to its segments. During the third quarter of fiscal 2003,
the Company ceased the allocation of corporate sales, marketing, finance and
administration expenses to the segments. All prior-period amounts have been
restated for comparative presentation.
C-123
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Information on reportable segments is as follows (in millions):
Years Ended June 30,
-----------------------------------------
2003 2002 2001
------- --------- -----------
Communications Product Group:
Net sales $ 333.0 $ 797.9 $ 2,810.2
Intersegment sales -- -- --
------- --------- ----------
Net sales to external customers 333.0 797.9 2,810.2
Operating income (loss) (228.5) (714.0) 363.2
Thin Film Products Group:
Net sales 347.4 307.7 573.3
Intersegment sales (4.6) (14.2) (152.5)
------- --------- ----------
Net sales to external customers 342.8 293.5 420.8
Operating income (loss) 52.6 (0.4) 161.3
Net sales by reportable segments 675.8 1,091.4 3,231.0
All other net sales 0.1 6.8 1.8
------- --------- ----------
Total net sales $ 675.9 $ 1,098.2 $ 3,232.8
======= ========= ==========
Operating income (loss) by reportable segments $(175.9) $ (714.4) $ 524.5
All other operating loss (260.1) (126.7) (547.3)
Unallocated amounts:
Acquisition-related charges and payroll taxes on stock option
exercises (71.1) (1,463.5) (6,239.6)
Reduction of goodwill, intangibles and other long-lived
assets and lived assets (393.6) (5,979.4) (50,085.0)
Interest and other income, net 32.5 48.3 48.5
Gain (loss) on sale of subsidiaries (2.2) 0.1 1,770.2
Gain (loss) on sale of investments 4.0 15.0 (559.1)
Reduction in fair value of investments (45.4) (225.8) (522.1)
Loss on equity method investments, net (8.5) (54.6) (883.9)
------- --------- ----------
Loss before income taxes $(920.3) $(8,501.0) $(56,493.8)
======= ========= ==========
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. Rest of world primarily represents Asia. The following table presents
net sales and identifiable assets by geographic regions (in millions):
Years Ended June 30,
------------------------------------
2003 2002 2001
------ -------- --------
Net sales:
North America $474.6 $ 807.3 $2,189.4
Europe 113.0 196.6 840.6
Rest of world 88.3 94.3 202.8
------ -------- --------
Total net sales $675.9 $1,098.2 $3,232.8
====== ======== ========
C-124
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
June 30,
------------------------
2003 2002
-------- --------
Identifiable assets:
North America $1,913.1 $2,688.6
Europe 49.4 157.7
Rest of world 175.3 158.2
-------- --------
Total identifiable assets $2,137.8 $3,004.5
======== ========
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 2003, Texas Instruments (a customer of our Thin Film Products
Group) accounted for 12% of net sales. During fiscal 2002, no customer accounted
for more than 10% of net sales. During fiscal 2001, three customers, Nortel,
Alcatel and Lucent (all customers of our Communications Product Group),
accounted for 14%, 12% and 10% of net sales, respectively.
Note 18. Sale of Subsidiaries' Net Assets
The following table summarizes the net gain (loss) the Company realized on
the sale of the assets of three subsidiaries during fiscal 2003 (in millions):
Gain on sale of Cronos $ 0.2
Loss on sale of Epion (1.7)
Loss on sale of SIFAM (0.7)
-----
Total $(2.2)
=====
During the second quarter of fiscal 2003, the Company completed the sale of
the majority of the assets of Cronos, a subsidiary located in Raleigh, North
Carolina, to MEMSCAP, a supplier of optical micro-electro-mechanical system
("MEMS") solutions located in France. As part of the transaction, the Company
received 10.5 million shares of MEMSCAP valued at $4.1 million. In addition, the
Company received warrants to purchase up to 6.5 million shares of MEMSCAP based
on the future performance of Cronos over a 30-month period following the
completion of the sale. In connection with the sale, the Company and MEMSCAP
entered into a long-term strategic supply relationship, under which MEMSCAP will
supply the Company with MEMS products.
During the second quarter of fiscal 2003, the Company completed the sale of
SIFAM, a subsidiary located in Torquay, United Kingdom, to SIFAM Fibre Optics
Limited. As part of the transaction, the Company received approximately 31,000
preference shares of SIFAM Fibre Optics Limited valued at approximately $0.8
million.
During the fourth quarter of fiscal 2003, the Company completed the sale of
the majority of the assets of Epion to New Epion. As part of the transaction,
the Company received approximately 0.8 million preferred shares and 0.2 million
warrants to purchase preferred shares of New Epion valued at approximately $3.6
million. After adjusting for the net costs of the assets sold, the Company
realized a loss of $1.7 million from the transaction.
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 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. At this time, however, management
does not anticipate receiving any common stock from Nortel. 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
C-125
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 2003, the Company held 24.7
million shares with a fair value of $67.4 million.
Note 19. Guarantees
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third-party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of June 30, 2003.
Product Warranties:
In general, the Company offers a one-year warranty for most of its products
in the Communications Products Group, and a three-month to one-year warranty for
most of its products in the Thin Film Products Group. The Company provides
reserves for the estimated costs of product warranties at the time revenue is
recognized. The Company estimates the costs of its warranty obligations based on
its 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 with specific
products. The Company periodically assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during 2003 (in millions):
Year Ended June 30, 2003:
- ---------------------------
Balance as of June 30, 2002 $ 73.6
Provision for warranty (6.1)
Utilization of reserve (18.1)
Other 3.0
------
Balance as of June 30, 2003 $ 52.4
======
Note 20. Patent License
During the three months ended December 31, 2002, the Company determined
that a payment on a patent dispute was probable and estimable. As a result, the
Company accrued $8.3 million in connection with the dispute and included the
amount under "Selling, general and administrative" expense.
During the three months ended March 31, 2003, the Company finalized a
royalty-bearing patent license agreement and determined that its total
liabilities were $19.2 million as of March 31, 2003. Therefore, the Company
accrued an additional $10.9 million in connection with the patent license
agreement. Of this amount, $2.2 million was recorded as prepaid royalty expense
which will be amortized to "Cost of sales" through December 2004, and $8.7
million was recorded as royalty expense under "Cost of sales" for the three
months ended March 31, 2003.
C-126
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In addition, the Company reclassified the previously recorded $8.3 million of
"Selling, general and administrative" expense to royalty expense under "Cost of
sales." Total royalty expense recorded in fiscal 2003 in connection with the
patent license was $17.3 million.
In connection with this patent license agreement, the Company will incur
additional minimum royalty obligations of $15.6 million to maintain the license
over the next five years.
Note 21. Subsequent Events (Unaudited)
Subsequent to the end of fiscal 2003, the Company purchased the properties
that were under a lease agreement with a special purpose entity for
approximately $44.7 million in cash. The transaction closed on September 16,
2003.
C-127
JDS UNIPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 22. Quarterly Financial Information (Unaudited)
The following table presents the Company's quarterly consolidated
statements of operations for fiscal 2003 and 2002 (in millions, except per-share
data):
June 30, March 31, December 31, September 30, June 30, March 31, December 31, September 30,
2003 2003 2002 2002 2002 2002 2001 2001
-------- -------- ----------- ----------- --------- --------- ----------- ------------
Net sales $ 160.6 $ 165.7 $ 156.6 $ 193.0 $ 221.7 $ 261.8 $ 286.1 $ 328.6
Cost of sales 121.6 142.9 171.0 185.0 252.1 240.1 335.6 343.3
-------- -------- -------- -------- --------- --------- --------- ---------
Gross profit (loss) 39.0 22.8 (14.4) 8.0 (30.4) 21.7 (49.5) (14.7)
Operating expenses:
Research and
development 32.1 36.8 40.1 44.7 63.7 57.8 64.1 69.2
Selling, general and
administrative 58.3 70.0 73.2 65.8 94.2 84.0 98.4 106.3
Amortization of
goodwill -- -- -- -- 12.8 260.4 331.6 332.7
Amortization of
other intangibles 3.9 3.7 3.8 8.4 37.6 113.3 109.7 110.6
Acquired in-process
research and
development -- -- -- 0.4 3.2 -- 22.1 --
Reduction of
goodwill -- -- 1.3 224.4 193.0 2,871.5 1,265.1 31.2
Reduction of other
long-lived assets 2.1 11.2 -- 154.6 592.7 1,012.6 2.5 10.8
Restructuring
charges 6.2 16.3 75.8 23.0 27.8 (10.8) -- 243.0
-------- -------- -------- -------- --------- --------- --------- ---------
Total operating
expenses 102.6 138.0 194.2 521.3 1,025.0 4,388.8 1,893.5 903.8
-------- -------- -------- -------- --------- --------- --------- ---------
Loss from operations (63.6) (115.2) (208.6) (513.3) (1,055.4) (4,367.1) (1,943.0) (918.5)
Interest and other
income, net 5.9 7.1 6.6 12.9 12.3 11.2 9.7 15.1
Gain (loss) on sale of
subsidiaries' assets (1.7) -- (0.5) -- 0.1 -- -- --
Gain on sale of
investments 0.3 0.9 1.3 1.5 4.1 4.5 6.4 --
Reduction in fair
value of
investments (7.7) (9.8) (8.8) (19.1) (111.4) (7.9) -- (106.5)
Loss on equity
method investments (0.8) (1.2) (4.0) (2.5) (1.0) (8.5) (25.8) (19.3)
-------- -------- -------- -------- --------- --------- --------- ---------
Loss before income
taxes (67.6) (118.2) (214.0) (520.5) (1,151.3) (4,367.8) (1,952.7) (1,029.2)
Income tax expense
(benefit) (6.0) 18.6 0.9 -- (108.8) (26.9) 177.8 195.2
-------- -------- -------- -------- --------- --------- --------- ---------
Net loss $ (61.6) $ (136.8) $ (214.9) $ (520.5) $(1,042.5) $(4,340.9) $(2,130.5) $(1,224.4)
======== ======== ======== ======== ========= ========= ========= =========
Net loss per share--
basic and diluted $ (0.04) $ (0.10) $ (0.15) $ (0.37) $ (0.76) $ (3.19) $ (1.60) $ (0.93)
======== ======== ======== ======== ========= ========= ========= =========
Shares used in per-
share calculation--
basic and diluted 1,430.4 1,422.6 1,414.7 1,412.3 1,365.0 1,359.0 1,330.1 1,322.7
======== ======== ======== ======== ========= ========= ========= =========
- ------------
(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.
(2) For the quarterly period ended December 31, 2002, the Company reclassified
$8.3 million from selling, general and administrative expense in connection
with a patent license agreement to cost of sales (see Note 20).
(3) For the quarterly period ended March 31, 2003, income tax expense included
$18.0 million related to an increase in the Company's valuation allowance
for deferred tax assets related to the financial reporting period ended June
30, 2002. See Note 14 for additional discussion of this expense.
C-128
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the end of the
period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer of the effectiveness of the design and operation of
our disclosure controls and procedures. While our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives, the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals
under all potential future conditions regardless of how remote. However,
based on the evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in our periodic SEC filings at the reasonable
assurance level.
(b) Changes in internal control over financial reporting. There has been no
change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
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 on Form 10-K. 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 2003 Annual Meeting of
Stockholders (the "Proxy Statement"), which will be filed with the Securities
and Exchange Commission within 120 days after the fiscal year ended June 30,
2003. 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.
C-129
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to SEC Release No. 33-8183 (as corrected by Release No.
33-8183A), the disclosure requirements of this Item are not effective until the
Annual Report on Form 10-K for the first fiscal year ending after December 15,
2003.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following items are filed as part of this Annual Report on Form 10-K:
1. Financial Statements:
Page
----
Report of Independent Auditors ....................................................... 76
Consolidated Statements of Operations -- Years Ended June 30, 2003, 2002 and 2001 .... 77
Consolidated Balance Sheets -- June 30, 2003 and 2002 ................................ 78
Consolidated Statements of Cash Flows -- Years Ended June 30, 2003, 2002 and 2001 .... 79
Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 2003, 2002
and 2001 ............................................................................. 80
Notes to Consolidated Financial Statements ........................................... 81
2. Financial Statement Schedules:
The following financial statement schedule is filed as part of this Annual
Report on Form 10-K. 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 on Form 10-K.
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, 2003 $42.9 $(3.4) $ -- $(16.8) $22.7
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
- ------------
(1) Allowance assumed through the acquisitions of Scion in fiscal 2002 and SDL
in fiscal 2001.
(2) Charges for uncollectible accounts, net of recoveries.
C-130
3. Exhibits:
Exhibit
Number Exhibit Description
- ------- ------------------------------------------------------------------------------------------------
3.1 (1) Restated Certificate of Incorporation.
3.2 (2) Certificate of Designation of the Series A Preferred Stock.
3.3 (3) Certificate of Designation of the Series B Preferred Stock.
3.4 (4) Certificate of Designation of the Special Voting Stock.
3.5 (18) Amended and Restated Bylaws of JDS Uniphase Corporation.
4.1 (5) Exchangeable Share Provisions attaching to the Exchangeable Shares of JDS Uniphase Canada Ltd.
(Formerly 3506967 Canada Inc.).
4.2 (6) Voting and Exchange Trust Agreement between JDS Uniphase, JDS Uniphase Canada Ltd. and CIBC
Mellon Trust Company.
4.3 (7) Exchangeable Share Support Agreement between JDS Uniphase, JDS Uniphase Canada Ltd. and JDS
Uniphase Nova Scotia Company.
4.4 (8) Registration Rights Agreement between JDS Uniphase, JDS Uniphase Canada Ltd. and The Furukawa
Electric Co., Ltd.
4.5 (9) Fifth Amended and Restated Rights Agreement between JDS Uniphase and American Stock Transfer
& Trust Company.
4.6 (18) Amended and Restated Rights Agreement between JDS Uniphase Canada Ltd. and CIBC Mellon Trust
Company (Amended and Restated as of February 6, 2003).
10.1 (10) Support Agreement between Uniphase Corporation, 3506967 Canada Inc., The Furukawa Electric
Company, Ltd., and JDS FITEL Inc.
10.2 (11) Amended and Restated 1993 Flexible Stock Incentive Plan (Amended and Restated as of November 9,
2001).
10.3 (12) Amended and Restated 1998 Employee Stock Purchase Plan (Amended and Restated as of July 31,
2002).
10.4 (13) Amended and Restated 1999 Canadian Employee Stock Purchase Plan (Amended and Restated as of
July 31, 2002).
10.5 (14) Retention Agreement for Jozef Straus.
10.6 (15) Change of Control Agreement for Jozef Straus.
10.7 (18) Transition Agreement for Jozef Straus.
10.8 (16) Employment Agreement for Syrus P. Madavi.
10.9 (18) Transition Agreement for Syrus P. Madavi.
10.10(18) Employment Agreement for Kevin J. Kennedy
10.11(18) Indemnification Agreement for Kevin J. Kennedy
10.12(18) Employment Agreement for Mark S. Sobey
10.13(18) Employment Agreement for Christopher S. Dewees
10.14(18) Employment Agreement for Donald E. Bossi
10.15(18) Employment Agreement for Joseph C. Zils
C-131
Exhibit
Number Exhibit Description
- ------- --------------------------------------------------------------------------------------------------------
10.16(17) Employment Agreement for Ronald C. Foster
21.1 (18) Subsidiaries of JDS Uniphase Corporation.
23.1 (18) Consent of Ernst & Young LLP, independent auditors.
24.1 Power of Attorney (included on page 153).
31.1 (18) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 (18) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (18) Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 (18) Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
(1) Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-K/A filed February 13, 2001.
(2) Incorporated by reference to Exhibit 10.3 of the Company's Current Report
on Form 8-K filed June 24, 1998.
(3) Incorporated by reference to Exhibit 3(i)(d) of the Company's Annual Report
on Form 10-K filed September 28, 1998.
(4) Incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-3 filed July 14, 1999.
(5) Incorporated by reference to the Company's definitive Proxy Statement on
Schedule 14A filed June 2, 1999.
(6) Incorporated by reference to Exhibit 4.2 of the Company's Annual Report on
Form 10-K filed September 1, 1999.
(7) Incorporated by reference to Exhibit 4.3 of the Company's Annual Report on
Form 10-K filed September 1, 1999.
(8) Incorporated by reference to Exhibit 4.5 of the Company's Annual Report on
Form 10-K filed September 1, 1999.
(9) Incorporated by reference to Exhibit 1 of the Company's Registration
Statement on Form 8-A12G/A filed February 18, 2003.
(10) Incorporated by reference to Exhibit 10.23 of the Company's Annual Report
on Form 10-K filed September 1, 1999.
(11) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q filed February 11, 2002.
(12) Incorporated by reference to Exhibit 10.3 of the Company's Annual Report on
Form 10-K filed September 17, 2002.
(13) Incorporated by reference to Exhibit 10.4 of the Company's Annual Report on
Form 10-K filed September 17, 2002.
(14) Incorporated by reference to Exhibit 10.11 of the Company's Annual Report
on Form 10-K filed September 28, 2000.
(15) Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-K filed September 17, 2002.
(16) Incorporated by reference to Exhibit 10.14 of the Company's Annual Report
on Form 10-K filed September 17, 2002.
(17) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q filed May 13, 2003.
(18) Filed herewith.
C-132
(b) Reports on Form 8-K:
The Company filed two Current Reports on Form 8-K during the three months
ended June 30, 2003:
Date of Report Item Reported on
- -------------- --------------------------------------------------------------------------------------
May 8, 2003 Regulation FD disclosure in connection with an investor presentation delivered by the
officers of the Company on May 8, 2003 that included written communication
comprised of slides.
April 29, 2003 Regulation FD disclosure in connection with a conference call delivered by the
officers of the Company on April 29, 2003 that included information contained in a
script.
(c) Other Information:
As of June 30, 2003, the following executive officers and members of the
Company's Board of Directors maintained "plans" under Rule 10b5-1 of the
Securities Exchange Act of 1934, as amended, for trading in shares of the
Company's common stock and/or exchangeable shares:
Christopher S. Dewees
Robert E. Enos
Peter A. Guglielmi
Casimir S. Skrzypczak
Jozef Straus
C-133
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 18, 2003 JDS UNIPHASE CORPORATION
By: /s/ KEVIN J. KENNEDY
--------------------------------
Kevin J. Kennedy, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald C. Foster his attorney-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ KEVIN J. KENNEDY Chief Executive Officer (Principal Executive September 18, 2003
- ------------------------- Officer)
Kevin J. Kennedy, Ph.D.
/s/ RONALD C. FOSTER Executive Vice President and Chief Financial September 18, 2003
- ------------------------- Officer (Principal Financial and Accounting
Ronald C. Foster Officer)
/s/ JOZEF STRAUS Director September 18, 2003
- -------------------------
Jozef Straus, Ph.D.
/s/ SYRUS P. MADAVI President and Chief Operating Officer, September 18, 2003
- ------------------------- Director
Syrus P. Madavi
/s/ BRUCE D. DAY Director September 18, 2003
- -------------------------
Bruce D. Day
/s/ ROBERT E. ENOS Director September 18, 2003
- -------------------------
Robert E. Enos
/s/ PETER A. GUGLIELMI Director September 18, 2003
- -------------------------
Peter A. Guglielmi
/s/ MARTIN A. KAPLAN Chairman September 18, 2003
- -------------------------
Martin A. Kaplan
/s/ RICHARD T. LIEBHABER Director September 18, 2003
- -------------------------
Richard T. Liebhaber
/s/ CASIMIR S. SKRZYPCZAK Director September 18, 2003
- -------------------------
Casimir S. Skrzypczak
C-134
[JDS Uniphase LOGO] VOTE BY INTERNET - www.proxyvote.com
JDS UNIPHASE CORPORATION Use the Internet to transmit your voting
1768 AUTOMATION PARKWAY instructions and for electronic delivery
SAN JOSE, CA 95131 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.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: JDSUN1 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
For Withhold For All To withhold authority to vote, mark "For All Except"
Vote On Directors All All Except and write the nominee's number on the line below.
1. Election of TWO Class II Directors
Nominees: 01) Robert E. Enos [ ] [ ] [ ] ____________________________________________________
02) Peter A. Guglielmi
Vote On Proposals For Against Abstain
2. Proposal to approve the JDS Uniphase Corporation 2003 Equity Incentive Plan. [ ] [ ] [ ]
3. Proposal to ratify the appointment of Ernst & Young LLP as the independent [ ] [ ] [ ]
auditors for JDS Uniphase Corporation for the fiscal year ending June 30,
2004.
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 [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
================================================================================
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
JDS UNIPHASE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
November 6, 2003
The undersigned hereby appoints KEVIN J. KENNEDY, Ph.D. and JOZEF STRAUS,
Ph.D., 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 10:00 a.m., Pacific Standard Time, on November 6, 2003 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 PROPOSALS 2 AND 3.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE