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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2000
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 000-25103
E-TEK Dynamics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-2337308
(State or other jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or organization)
1865 Lundy Avenue
San Jose, California 95131
(Address of principal executive office and zip code)
(408) 546-5000
(Registrant's telephone number, including area code)
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 filing requirements
for the past 90 days.
YES X NO
--------- ---------
As of January 1, 2000, 67,915,191 shares of the Registrant's common stock were
outstanding.
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E-TEK Dynamics, Inc.
FORM 10-Q
January 1, 2000
INDEX
Page
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Quarter and
Six Months Ended January 1, 2000 and January 1, 1999 4
Consolidated Balance Sheets as of January 1, 2000 and
June 30, 1999 5
Consolidated Statements of Cash Flows for the Six Months
Ended January 1, 2000 and January 1, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submision of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
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Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
(Unaudited)
Quarter Ended Six Months Ended
---------------------------- -------------------------------
Jan. 1, Jan. 1, Jan. 1, Jan. 1,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net revenues $ 72,465 $ 38,708 $ 132,807 $ 71,650
Cost of goods sold 36,549 18,854 66,730 34,843
----------- ------------- --------------- --------------
Gross profit 35,916 19,854 66,077 36,807
------------- ------------- --------------- --------------
Operating expenses:
Research and development 6,308 3,255 11,221 6,331
Selling, general
and administrative 8,516 5,748 16,138 11,143
Purchased in-process
research and development - - 1,630 -
Amortization of intangibles 8,325 - 14,590 -
------------- ------------- --------------- --------------
Total operating
expenses 23,149 9,003 43,579 17,474
------------- ------------- --------------- --------------
Operating income 12,767 10,851 22,498 19,333
Interest income 2,418 822 3,957 1,410
Interest expense (345) (340) (837) (625)
------------- ------------- --------------- --------------
Income before income taxes 14,840 11,333 25,618 20,118
Provision for income taxes 5,639 4,533 9,735 8,047
------------- ------------- --------------- --------------
Net income 9,201 6,800 15,883 12,071
Convertible preferred
stock accretion - 1,482 - 3,882
------------- ------------- --------------- --------------
Net income available to Common
Stockholders $ 9,201 $ 5,318 $ 15,883 $ 8,189
============= ============= =============== ==============
Net Income per share:
Basic $ 0.14 $ 0.15 $ 0.25 $ 0.29
Diluted $ 0.13 $ 0.11 $ 0.23 $ 0.20
Shares used in net income per share calculations:
Basic 65,438 34,777 63,717 28,350
Diluted 70,656 60,125 68,986 59,219
See Notes to Consolidated Financial Statements.
</TABLE>
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E-TEK Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 1, June 30,
2000 1999
----------------- -------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 177,037 $ 55,090
Accounts receivable 46,398 29,831
Inventories 49,036 20,367
Deferred tax assets 13,649 13,542
Other current assets 5,165 3,542
----------------- -------------------
Total current assets 291,285 122,372
Property and equipment, net 87,749 61,874
Long-term investments 15,416 11,665
Goodwill and other intangibles, net 82,218 34,585
----------------- -------------------
Total assets $ 476,668 $ 230,496
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,940 $ 17,762
Accrued liabilities 28,458 26,352
Income taxes payable 6,971 4,337
Current portion of capital
lease obligations 1,327 1,277
Current portion of long-term debt 10,167 6,101
----------------- -------------------
Total current liabilities 79,863 55,829
Capital lease obligations,
net of current portion 1,616 2,281
Long-term debt, net of current portion 22,949 19,232
Deferred income taxes 18,802 3,481
----------------- -------------------
Total liabilities 123,230 80,823
----------------- -------------------
Stockholders' equity:
Preferred Stock, $0.01 par value,
25,000 shares authorized, none issued
and outstanding - -
Common stock, $0.001 par value,
300,000 shares authorized, 67,915 and
62,054 shares issued and outstanding,
respectively 68 63
Additional paid-in capital 401,017 216,124
Notes receivable from stockholders (9,638) (11,454)
Deferred compensation (2,801) (3,805)
Distribution in excess of
net book value (83,901) (83,901)
Retained earnings 48,529 32,646
Cumulative translation adjustment 164 -
----------------- -------------------
Total stockholders' equity 353,438 149,673
----------------- -------------------
Total liabilities and
stockholders' equity $ 476,668 $ 230,496
================= ===================
</TABLE>
See Notes to Consolidated Financial Statements.
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E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Jan.1, Jan.1,
2000 1999
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,882 $ 12,071
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation and amortization 22,623 5,303
Stock compensation expense 350 752
Imputed interest income (79) (482)
Purchased in-process research
and development 1,630 -
Changes in assets and liabilities:
Accounts receivable (13,109) (6,397)
Inventories (24,583) (6,544)
Deferred income taxes 24 -
Other current assets (983) (468)
Accounts payable 12,350 1,920
Accrued liabilities (2,008) 9,019
Income taxes payable 2,633 562
------------------ -------------------
Net cash provided by
operating activities 14,730 15,736
------------------ -------------------
Cash flows from investing activities:
Additions to property and equipment (28,408) (16,794)
Long-term investments (3,001) -
Payment from (advance to) joint venture - 7,000
Acquisition of Fibx, net of cash received (12,550) -
Acquisition of Kaifa, net of cash received (10,551) -
------------------ -------------------
Net cash used in investing
activities (54,510) (9,794)
------------------ ------------------
Cash flows from financing activities:
Repurchase of Common Stock (3) -
Proceeds from issuance of Common Stock, net - 43,616
Proceeds from secondary offering, net 146,990 -
Proceeds from exercise of Common
Stock Options 5,406 -
Proceeds from Employee
Stock Purchase Plan 1,970 -
Principal payments on capital
lease obligations (615) (627)
Principal repayments on notes
receivable from stockholders 2,530 -
Borrowings on short-term debt 269 -
Payments on short-term debt (898) -
Borrowings on long-term debt 10,000 13,330
Payments on long-term debt (4,083) (3,282)
Other, net 161 -
------------------ -------------------
Net cash provided by
financing activities 161,727 53,037
------------------ -------------------
Net increase in cash and
cash equivalents 121,947 58,979
Cash and cash equivalents at
beginning of period 55,090 21,918
------------------ -------------------
Cash and cash equivalents at
end of period $ 177,037 $ 80,897
================== ===================
Supplemental disclosure of cash flow information:
Interest paid $ 1,038 $ 599
Income taxes paid $ 7,041 $ 7,485
</TABLE>
See Notes to Consolidated Financial Statements.
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E-TEK Dynamics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial data as of January 1, 2000 and January 1,
1999 and for the quarter and six month periods ended January 1, 2000 and January
1, 1999, have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in our
Registration Statement on Form S-1 declared effective on August 11, 1999.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of January 1, 2000 and for the 3 month
and 6 month periods (as applicable) ended January 1, 2000 and January 1, 1999,
have been made. The results of operations for the period ended January 1, 2000
are not necessarily indicative of the operating results for the full year.
2. Inventories
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Jan.1, June 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Raw materials................... $20,816 $10,613
Work in process................. 20,267 7,577
Finished goods.................. 7,953 2,177
------------------ ------------------
$49,036 $20,367
================== ==================
</TABLE>
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3. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Jan. 1, Jan.1, Jan. 1, Jan.1,
2000 1999 2000 1999
------- ------ --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income................... $ 9,201 $ 6,800 $ 15,883 $ 12,071
Convertible Preferred Stock
accretion.................... - 1,482 - 3,882
----------- ---------- -------- ---------
Net income available to Common
Stockholders (Basic)........ 9,201 5,318 15,883 8,189
Convertible Preferred Stock
accretion.................... - 1,482 - 3,882
--------- --------- --------- ---------
Net income available to Common
Stockholders and Assumed
Conversions (Diluted)........ $ 9,201 $ 6,800 $ 15,883 $ 12,071
========= ========= ======= ==========
Denominator:
Denominator for basic earnings per
share-weighted average
common shares................... 65,438 34,777 63,717 28,350
Effect of dilutive securities
Common Stock options............. 2,891 1,592 2,747 1,361
Unvested Common Stock subject
to repurchase................ 2,327 4,782 2,522 4,975
Convertible Preferred Stock........ - 18,974 - 24,533
--------- --------- --------- -------
Denominator for dilutive earnings per
share-adjusted weighted average
common shares and
assumed conversions............. 70,656 60,125 68,986 59,219
Basic earnings per share............ $0.14 $0.15 $0.25 $0.29
---------- --------- ---------- ---------
Diluted earnings per share....... $0.13 $0.11 $0.23 $0.20
---------- ---------- --------- ----------
</TABLE>
4. Comprehensive income
Comprehensive income for the quarter ended January 1, 2000 was $9,081,000.
5. Recent Financial Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The adoption of SFAS 133 has been deferred to all fiscal
quarters of fiscal years beginning after June 15, 2000, by SFAS 137. We do not
expect the adoption of SFAS 133 to have a material impact on our results of
operations.
6. Subsequent Events
On January 17, 2000, we announced the signing of an Agreement and Plan of
Reorganization and Merger between E-TEK Dynamics, Inc. and JDS Uniphase
Corporation. Upon completion of this transaction, our stockholders will receive
1.1 shares of JDS Uniphase common stock for each share of E-TEK common stock
they own, and we will become a wholly-owned subsidiary of JDS Uniphase.
Completion of the transaction is subject to the approval of our stockholders, as
well as customary closing conditions and regulatory approvals. Accordingly there
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can be no assurance that the transaction will be completed. On January 19, 2000,
we filed the press release announcing the transaction and the merger agreement
as exhibits to Form 8-K. Those documents contain the specific terms and
conditions of the transaction. More information about JDS Uniphase is available
in their reports to the Securities and Exchange Commission, which are on the
Internet at www.sec.gov. Those reports include a Form 8-K filed January 18, 2000
by JDS Uniphase, with unaudited pro forma condensed combined consolidated
financial statements showing E-TEK and JDS Uniphase on a combined pro forma
basis for certain periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Readers are referred to the Risk Factors section in this
report and to the risk factors set out in our Registration Statement on Form S-1
(File No. 333-83857) and Annual Report on Form 10-K which describe factors that
could cause actual events to differ from those contained in the forward looking
statements.
Overview
We design, manufacture and sell high quality fiber optic components, modules and
subsystems for optical networks. Optical networks are being deployed by
telecommunications service providers like AT&T and MCI WorldCom to address the
demand for applications such as Internet access, e-mail, and electronic commerce
that require high capacity, high speed data transmission. Our products are
designed into optical systems built for these service providers' networks by
telecommunications equipment manufacturers. Our products guide, route or amplify
the light signals which transmit data within an optical network, in both
terrestrial and and undersea networks as well as in metropolitan area and cable
networks.
Revenues from product sales are generally recognized at the time the product is
shipped, with provisions established for estimated product returns and
allowances. A relatively small number of customers has accounted for a
significant portion of our revenues to date, and we expect that this trend will
continue for the foreseeable future. This has historically resulted in uneven
orders and fluctuating demand for our products.
The fiber optic component industry is characterized by rapidly declining average
selling prices and increasing unit volumes. These price declines have had an
adverse affect on our gross margins.
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Results of Operations
The following table sets forth, for the periods indicated, the percentages of
net revenues represented by certain items reflected in our Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
Quarter ended Six Months ended
------------- ----------------
Jan. 1, Jan. 1, Jan. 1, Jan. 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........ 50.4 48.7 50.2 48.6
------------ ------------ ------------ ----------
Gross profit........... 49.6 51.3 49.8 51.4
------------- ----------- ----------- ----------
Operating expenses:
Research and
development........ 8.7 8.4 8.5 8.8
Selling, general and
administrative.......... 11.8 14.9 12.2 15.6
Purchased in-process
R&D.................... 0.0 0.0 1.2 0.0
Amortization of
intangibles............. 11.5 0.0 11.0 0.0
--------- ------------ ------------ -----------
Total operating
expenses......... 32.0 23.3 32.9 24.4
---------- ----------- --------- -----------
Operating income.......... 17.6 28.0 16.9 27.0
Interest income................ 3.3 2.1 3.0 2.0
Interest expense............... (0.4) (0.8) (0.6) (1.0)
------------ ------------ ----------- ----------
Income before income taxes..... 20.5 29.3 19.3 28.0
Provision for income taxes... 7.8 11.7 7.3 11.2
----------- ----------- ---------- ----------
Net income................. 12.7% 17.6% 12.0% 16.8%
------------ ------------ ---------- ---------
</TABLE>
Quarters Ended January 1, 2000 and January 1, 1999
Net Revenues
Net revenues increased 87.2% to $72.5 million in the second quarter of fiscal
2000 from $38.7 million in the second quarter of fiscal 1999. The revenue
increase was primarily due to increased shipments of our Wavelength Division
Multiplexer components, modules and subsystems (WDMs), couplers and micro-optic
integrated components (MOICs). WDMs accounted for the majority of our total
revenues and this is expected to continue for the remainder of fiscal 2000. We
also increased revenues from new customers in the optical systems market,
particularly those focused on the metropolitan, access and cable markets.
Customers continue to demand a wide variety of wavelengths with more difficult
filter and packaging specifications. This may decrease our usable filter supply
and affect our ability to ship products and generate revenues. In addition, our
customers are requesting higher levels of integration, such as packaging WDM
devices into modules, which may impact our ability to build and ship products
and generate revenues.
Gross Profit
Gross profit increased 80.9% to $35.9 million for the second quarter of fiscal
2000 from $19.9 million in the second quarter of fiscal 1999. Cost of goods sold
consists of raw material costs, direct labor costs, warranty costs, royalties
and overhead related to our manufacturing operations. Gross profit margins
declined from 51.3% to 49.6% between these periods due to declining average
selling prices (ASPs) and increased costs associated with expansion of our
manufacturing capacity in San Jose and the integration of our recent
acquisitions. In January 2000 we expanded into an additional 80,000 square foot
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manufacturing facility in San Jose, California. We expect growth and integration
to continue to have an adverse affect on our margins until we can absorb the
additional manufacturing capacity through increased revenues. Also, as more
people are hired to meet increased unit volumes, the manufacturing yield and
quality may decline, which may have an adverse impact on our margins. We also
expect the decline in ASPs to continue in the future.
Research and Development Expenses
Research and development expenses consist of compensation costs for personnel,
depreciation of equipment, and prototype materials. Research and development
expenses were $6.3 million for the second quarter of fiscal 2000 representing
8.7% of net revenues. This represents a 93.8% increase over the second quarter
of fiscal 1999 research and development expenses of $3.3 million or 8.4% of
revenues. The increase was primarily due to the increase in research and
development personnel and material costs. We expect that research and
development expenses will continue to increase in absolute dollars for the
remainder of fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation costs for
personnel, sales commissions, travel expenses, marketing programs, professional
services, accounting, human resources, executive management and consulting.
Selling, general and administrative expenses were $8.5 million for the second
quarter of fiscal 2000, representing 11.8% of net revenues. This represents a
48.2% increase over selling, general and administrative expenses for the second
quarter of fiscal 1999 of $5.8 million or 14.9% of net revenues. The increase in
absolute dollars of expenditures over this period reflected the hiring of
additional selling, marketing and administrative personnel, increased
commissions paid on higher revenues, and increased promotional expenses. We
anticipate that our selling, general and administrative expenses will increase
in absolute dollars for the remainder of fiscal 2000.
Amortization of Purchased Intangibles
Amortization of purchased intangibles was $8.3 million in the second quarter of
fiscal 2000 due to the intangible assets generated from our acquisitions of
Kaifa, ElectroPhotonics, and FibX, all of which were accounted for as purchases.
Interest Income and Interest Expense
Our interest income was approximately $2.4 million for the second quarter of
fiscal 2000, which represents an increase of $1.6 million from the second
quarter of fiscal 1999. The increase in interest income was the result of higher
investment balances obtained from our follow-on public offering of our stock in
August 1999, that generated $147.0 million in cash, net of transaction costs.
Interest expense, incurred on borrowings secured by our property and equipment,
and on capital leases, was $0.4 million for the second quarter of fiscal 2000.
Provision for Income Taxes
Our combined federal and state income tax provision was 38% for the second
quarter of fiscal 2000, slightly lower than the 40% tax provision rate for
fiscal 1999. The higher rate for fiscal 1999 is due to a permanent tax
difference resulting from our purchase of ElectroPhotonics. Our future tax rate
may be adversely affected by acquisition related activities.
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Six Months Ended January 1, 2000 and January 1, 1999
Net Revenues
Net revenues increased 85.4% from $71.7 million for the six months ended January
1, 1999 to $132.8 million for the six months ended January 1, 2000. The increase
in net revenues reflected higher shipments of our WDMs, Couplers, and MOICs.
Gross Profit
Gross profit increased 79.5% from $36.8 million for the six months ended January
1, 1999 to $66.1 million for the six months ended January 1, 2000. Gross profit
margins declined from 51.4% to 49.8% during these periods, primarily due to
declining ASPs and the additional costs associated with the expansion of our
manufacturing capacity.
Research and Development Expenses
Research and development expenses increased 77.2% from $6.3 million for the six
months ended January 1, 1999, which represented 8.8% of revenues, to $11.2
million for the six months ended January 1, 2000, which represented 8.5% of
revenues. The increase was primarily due to the hiring of additional personnel
and higher material costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 44.8% from $11.1 million
for the six months ended January 1, 1999 which represented 15.6% of revenues, to
$16.1 million for the six months ended January 1, 2000, which represented 12.2%
of revenues. The increase in absolute dollars of expenditures over this period
reflected the hiring of additional selling, marketing and administrative
personnel, increased commissions paid on higher revenues, and increased
promotional expenses.
Interest Income and Interest Expense
Interest income increased from $1.4 million in the six months ended January 1,
1999 to $4.0 million in the six months ended January 1, 2000, primarily due to
the higher level of investment balances from the cash received on the follow-on
stock offering in August 1999. Interest expense increased from $0.6 million in
the six months ended January 1,1999 to $0.8 million in the six months ended
January 1, 1999, reflecting a higher level of borrowings.
Amortization of Purchased Intangibles
Amortization of purchased intangibles was $14.6 million for the six months ended
January 1, 2000, due to the intangible assets generated from our acquisitions of
Kaifa, ElectroPhotonics, and FibX, all of which were accounted for as purchases.
Liquidity and Capital Resources
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from our operations, borrowings and
equity financings. Our operating activities provided cash of $14.7 million for
the six months ended January 1, 2000 as compared to $15.7 million for the six
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months ended January 1, 1999. Cash provided by operating activities is primarily
the result of net income, depreciation and amortization expenses and accounts
payable, offset in part by increases in accounts receivable and inventory, and
decreases in accrued liabilities. At January 1, 2000 we had cash and cash
equivalents of $177 million and working capital of $211.4 million.
Net cash used in investing activities was $54.5 million for the six months ended
January 1, 2000 as compared to $9.8 million used in investing activities for the
six months ended January 1, 1999. The net cash used in the six months ended
January 1, 2000 related to capital expenditures and to the Kaifa and FibX
acquisitions.
Net cash provided by financing activities was $161.7 million for the six months
ended January 1, 2000, as compared to $53.0 million for the six months ended
January 1, 1999. Net cash provided by financing activities for the six months
ended January 1, 2000 resulted primarily from net proceeds of approximately
$147.0 million from our follow-on public offering.
Our cash is invested in short term taxable funds with a maximum duration of 120
days, and our debt instruments are all fixed rate instruments. Our invested cash
may produce less income if interest rates fall. Currently, the majority of our
international sales are U.S. dollar denominated. We could incur additional
expenses due to exchange rate risk because many expenses relating to our
international operations are denominated in foreign currencies. We have not
entered into any currency hedging activities.
Year 2000 Compliance
We have not had any disruption to our computer programs or business as a result
of year 2000 compliance. However, if our customers or suppliers encounter any
year 2000 problems, our business could be disrupted as well.
Risk Factors
You should carefully consider these risk factors in addition to the other
information in this Report. You should also consider the risk factors set forth
in other documents filed with the SEC, including the Annual Report on Form 10-K
for the fiscal year ended June 30, 1999, and the Registration Statement on Form
S-1 dated August 11, 1999. Any of these factors could have a material adverse
impact on our business, financial condition and results of operations.
Our proposed merger with JDS Uniphase Corporation involves risks and
uncertainties, and requires stockholder and regulatory approval.
On January 17, 2000, we announced the signing of an agreement with JDS Uniphase
Corporation under which JDS Uniphase proposes to acquire E-TEK shares in a
merger transaction. If this transaction closes, our stockholders will receive
1.1 shares of JDS Uniphase common stock for each share of E-TEK common stock
they own, and we will become a wholly-owned subsidiary of JDS Uniphase.
Completion of this proposed transaction is subject to the approval of our
stockholders, as well as customary closing conditions and regulatory approvals.
On January 19, 2000, we filed with the SEC a press release announcing the
transaction and the merger agreement as exhibits to our Form 8-K. Those
documents contain the specific terms and conditions of the transaction. There
are no assurances that this proposed merger will occur, or that the performance
of the combined company will be favorable to our stockholders, or that the
pendency of the proposed merger will not have an adverse effect on us in the
interim.
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The success of the merger between E-TEK and JDS Uniphase may require, among
other things, integration or coordination of different operational and
management teams, as well as different business processes and infrastructures.
Successful integration of the two companies will depend on a variety of factors,
including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination of
different research and development and product manufacturing facilities. The
diversion of management resources necessary to successfully complete this
integration or coordination may temporarily adversely impact business
operations.
It is not certain that JDS Uniphase and E-TEK can be successfully integrated in
a timely manner or at all or that any of the anticipated benefits of the merger
will be realized. Failure to do so could materially harm the business and
operating results of the combined company. Also, neither JDS Uniphase nor E-TEK
can assure you that the growth rate of the combined company will equal the
historical growth rate experienced by JDS Uniphase and E-TEK.
Customer and employee uncertainty related to the merger could harm E-TEK.
Our customers may, in response to the announcement of the merger, delay or defer
purchasing decisions. Any delay or deferral in purchasing decisions by our
customers could seriously harm the business of the combined company. In
addition, existing and future strategic alliances that may be beneficial to our
success may be adversely affected as a result of E-TEK becoming a wholly owned
subsidiary of JDS Uniphase. Similarly, our employees may experience uncertainty
about their future role with the combined company until or after specific
integration plans are announced or executed. This may adversely affect our
ability to attract and retain key management, marketing and technical personnel.
If a major customer delays, reduces or defers purchases, our revenues will
decline.
We have depended on a small number of large customers for a substantial portion
of our sales, and we expect this to continue for the foreseeable future. In the
second quarter of fiscal 2000, our three largest customers and their related
entities accounted for 56% of our revenues. Industry consolidation may reduce
the number of potential customers and increase our dependence on a small number
of customers.
Further, we do not have long-term contracts with many customers, and our
existing contracts do not obligate our customers to buy material amounts of our
products. In addition, we have recently signed contracts that require us to hold
safety stock, which results in our holding inventory and not recognizing
revenues until shipment. Therefore, sales in a particular period are difficult
to predict and we may experience unforeseen decreases in purchases,
cancellations of purchase orders or deferrals of purchases.
If sales of our wavelength division multiplexing products decline, our revenues
will be materially reduced.
Sales of wavelength division multiplexing components, modules and subsystems
accounted for over 50% of our revenues in the second quarter of fiscal 2000, and
are expected to account for more than 50% of our total revenues in fiscal 2000.
If sales of this product line decline, our overall revenues will be lower, which
could result in operating losses. We may not be successful in taking steps to
mitigate the risks associated with reduced demand for our existing products.
14
<PAGE>
If we cannot obtain an adequate supply of thin film filters or other raw
materials or equipment, our product revenues may decline.
Thin film filters are a key raw material for WDMs and are difficult to produce.
We have previously experienced and continue to experience shortages of these
filters, which has limited our ability to ship product and generate revenues.
Also, we depend on a limited number of suppliers for other key materials and
equipment, some of which are sole sources. Delivery delays, quality problems and
price increases could hurt our ability to supply our customers with products in
a timely manner, which can cause our shipments and revenues to decline.
The increase in the number of WDM wavelengths, narrower spacing requirements and
greater integration increases product complexity, which may adversely affect our
yields and revenues.
The increased need for bandwidth is being satisfied by using more wavelengths
with narrower spacing between each wavelength. Both of these trends (more
wavelengths and tighter spacing) increase the complexity and variety of filters
needed and the risk of lower yields. In addition, the trend towards increased
integration from devices to modules, and to subsystems means that any missing
wavelengths can delay shipment of the whole module or subsystem, which would
have an adverse impact on our revenues. Furthermore, building more integrated
products is more difficult, and could impact our ability to build and ship
products and generate revenues. Other technologies that offer narrower
wavelength spacing, such as array waveguide or fiber Bragg gratings, have been
introduced to the market as an alternative to thin film filter WDMs. Acceptance
of these products could aversely impact our revenues.
We may not be able to reduce our manufacturing costs sufficiently or plan our
manufacturing expansion accurately.
We expect the price of our existing products to decline due to various factors,
such as increased competition, including from companies with lower labor and
production costs; a limited number of potential customers with significant
bargaining leverage; introduction of new products by competitors; and greater
economies of scale for higher volume manufacturers. To maintain our existing
revenues, we must increase our unit volumes and our manufacturing capacity.
Adding capacity increases our fixed costs and the levels of unit shipments we
must achieve to maintain gross margins. As a result, if we are unable to
increase our revenues or continuously reduce our manufacturing costs, our gross
margins may decline and we could incur losses.
We are increasing our manufacturing capacity at our existing facilities in San
Jose, California as well as pursuing the expansion of overseas manufacturing in
Taiwan and China. Developing overseas manufacturing capabilities involves
significant risks which could materially adversely affect our gross margins and
revenues, including:
Our inability to qualify a new manufacturing line for all of our
customers;
unanticipated cost increases;
unavailability or late delivery of equipment;
unforeseen environmental or engineering problems;
15
<PAGE>
personnel recruitment delays; and
political instability.
Expanding our manufacturing capacity requires substantial time to build out and
equip facilities and train personnel. If we receive orders substantially in
excess of our planned capacity, we might not be able to fulfill them quickly
enough to meet customer requirements. Our inability to deliver products timely
could enable competitors to win business from our customers.
We may not be able to effectively increase production and maintain acceptable
manufacturing yields, resulting in delay of product shipments and impairment of
our gross margins.
Manufacturing our products is highly complex and labor intensive. As we rapidly
increase production and hire more people, our manufacturing yield, which is the
percentage of our products which meet customer specifications, could decline,
resulting in product shipment delays, possible lost revenue opportunities,
higher customer returns, and impaired gross margins. Some of our manufacturing
lines have experienced lower than expected yields, which could continue in the
future. Rapid increases in production levels to meet unanticipated demand may
also result in higher overtime costs and other expenses.
Our stock price could fluctuate significantly due to our pending merger with JDS
Uniphase, and to the unpredictability of our quarterly results.
Since the announcement on January 17, 2000 of our agreement to merge with JDS
Uniphase, our stock price has fluctuated significantly. Our stock price may be
affected by fluctuations in the price of JDS Uniphase shares and a higher level
of speculative trading while the merger is pending approval.
Also, our revenues and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future as
a result of several factors, some of which are outside of our control. These
factors include:
the size and timing of customer orders;
our ability to manufacture and ship our products on a timely basis;
our ability to obtain sufficient supplies to meet our product
manufacturing needs;
our ability to meet customer product specifications and qualifications;
long and unpredictable sales cycles of up to a year or more;
our ability to sustain high levels of quality across all product lines;
changes in our product mix;
customer cancellations or delivery deferrals;
seasonality of customer demand; and
difficulties in collecting accounts receivable.
16
<PAGE>
Due to these factors, results are difficult to predict and you should not rely
on quarter-to-quarter comparisons of our results of operations as an indication
of our future performance. It is possible that, in future periods, our results
of operations may be below the expectations of public market analysts and
investors.
If we do not achieve our planned revenues, we could incur operating losses
because our expenses are fixed in the short term.
We make manufacturing and related capital expenditures in anticipation of a
level of customer orders that may vary over multiple quarters. Our expenditures
are largely based on anticipated future sales and a significant portion of our
expenses is fixed in the short term. If anticipated levels of customer orders
are not received, we may not be able to reduce our expenses quickly enough to
prevent a decline in our gross margins and operating income.
The fiber-optic component market is highly competitive, and we could lose sales
to our competitors and our customers.
Many of our competitors have greater financial and other resources than us and
they may be able to more quickly:
respond to new technologies or technical standards;
react to changing customer requirements and expectations;
manufacture, market and sell current products;
develop new products or technologies; and
deliver competitive products at lower prices.
As a result of these factors, our customers could decide to purchase products
from our competitors and reduce their purchases from us.
In addition, our competitors and our customers may acquire our suppliers and
potential suppliers. Our customers may also develop their own internal sources
of supply in competition with us. For example, Corning, one of our customers,
has announced an expansion of its ability to produce thin film optical filters
by a factor of ten, as well as the acquisition of Oak Industries, a maker of
components used in WDM systems. Lucent Technologies, a customer of ours, has
announced an investment in privately-held Horizon Photonics, Inc., a provider of
automated manufacturing of passive optical components. Lucent has also commented
publicly that it sells a large portion of its components on the merchant market
in addition to supplying its own needs. Cisco Systems, an emerging player in WDM
systems, has announced the acquisition of Pirelli Optical Systems and a
strategic investment of $100 million in Pirelli's optical components and
submarine optical transmission system businesses. In addition, Nortel Networks,
one of our customers, has announced a $400 million investment in its optical
networking and components business including a new facility for the fabrication
of optical components.
If our new product introductions are delayed, or if our new products have
defects, our revenues would be harmed and our costs could increase.
If we do not introduce new products in a timely manner, we will not obtain
incremental revenues from these products or be able to replace more mature
products with declining revenues or gross margins. Customers could decide to
purchase components from our competitors, resulting in lost revenue over a
longer term. We could also incur unanticipated costs if new product
introductions are delayed or we need to fix defective new products.
17
<PAGE>
Acquisitions and investments may adversely affect our business.
Our strategy includes the acquisition and integration of additional companies'
products, technologies and personnel. We have limited experience in acquiring
outside businesses. Acquisition of businesses requires substantial time and
attention of management personnel and may also require additional equity or debt
financings.
Integration of newly established or acquired businesses can be disruptive. There
is no assurance that we will identify appropriate targets, will acquire such
businesses on favorable terms, will obtain JDS Uniphase's consent for any
proposed acquisitions, or will be able to integrate such organizations into our
business successfully.
Financial consequences of our acquisitions and investments may include
potentially dilutive issuances of equity securities; large one-time write-offs;
reduced cash balances and related interest income; higher fixed expenses which
require a higher level of revenues to maintain gross margins; the incurrence of
debt and contingent liabilities; and amortization expenses related to goodwill
and other intangible assets.
If a key sales representative or distributor stopped selling or reduced sales of
our products, our revenues would suffer.
We sell substantially all of our products through a network of independent sales
representatives and distributors, the majority of whom have exclusive rights to
sell our products in certain territories. Our sales representatives and
distributors could decide to reduce or stop selling our products.
We may not be able to recruit and retain the personnel we need to succeed.
If we cannot hire and retain technical personnel with advanced skills and
experience in the specialized field of fiber optics, our product development
programs may be delayed and our customer support efforts may be less effective.
If we are unable to hire the necessary managerial, sales and marketing
personnel, we may not be able to grow our revenues.
Our international sales could be delayed or could have additional costs which
would lower their contribution to our gross profit.
We generate a significant portion of our revenues from sales to companies
located outside the United States, principally in Europe. As a result, a
significant portion of our sales faces risks inherent in international
operations, including:
government controls, which can delay sales or increase our costs;
export licensing requirements and restrictions, which can delay or
prevent sales;
tariffs and other trade barriers, which can increase our costs and make
our products uncompetitive; and
greater difficulty in accounts receivable collection and longer
collection periods, which can increase our need for working capital.
18
<PAGE>
Currently, the majority of our international sales are U.S. dollar denominated.
As a result, our customers' orders could fluctuate significantly based upon
changes in our customers' currency exchange rates in relation to the U.S.
dollar. A large increase in the value of the U.S. dollar could make our products
more expensive to our foreign customers, resulting in cancelled or delayed
orders and decreased revenues.
Our international operations expose us to additional costs, some of which we
cannot predict.
Our recent expansion of our operations into other countries, such as Canada,
Taiwan and China, has increased the legal, tax and other business complexities
that we must comply with. If we cannot comply with local regulations, we could
incur unexpected costs and potential litigation. Our international operations
could cause our average tax rate to increase. We could also incur expenses due
to the exchange rate risk because many expenses relating to our international
operations are denominated in foreign currencies, while our revenues are in U.S.
dollars.
If we cannot protect or enforce our intellectual property rights, our
competitive position may be impaired.
Third parties may attempt to use our confidential information and proprietary
technologies without authorization. Policing unauthorized use is expensive and
difficult. We cannot be sure that will be able to prevent misappropriation or
infringement of our intellectual property.
Intellectual property claims against us could cause our business to suffer.
In the past, we have received notifications alleging that we are infringing the
intellectual property rights of third parties, and we may in the future face
claims that our products infringe the rights of another. Whether or not these
claims are successful, we would likely incur significant costs and diversion of
our resources defending these claims.
We could incur costs and experience disruptions complying with environmental
regulations.
We handle small amounts of hazardous materials as part of our manufacturing
activities. We may be required to incur environmental remediation costs to
comply with current or future environmental laws.
Our operations could be disrupted by natural disasters.
Our facilities are susceptible to damage from earthquakes as well as from fire,
floods, loss of power or water supply, telecommunications failures and similar
events. Any of these events could significantly disrupt our operations.
19
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
We are involved in disputes and litigation in the normal course of our business.
We do not believe that the outcome of any of these disputes or litigation will
have a material adverse effect on our business, financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on October 28, 1999. At the meeting,
the stockholders elected Dr. Joseph W. Goodman to serve as a Class I Director
until our Annual Meeting in 2002. The vote in favor of Dr. Goodman's election
was 54,478,802, with 13,414 votes withheld. The proposal to reappoint
PricewaterhouseCoopers LLC as our auditor was approved with a vote of 54,485,800
in favor; 1,870 against; and 4,546 abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
27.1 Financial data schedule
(b) Reports on Form 8-K
We filed a report on Form 8-K on January 19, 2000,
reporting the Agreement and Plan of Reorganization and
Merger among JDS Uniphase Corporation, Rainbow
Acquisition, Inc. and E-TEK Dynamics, Inc.
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: January 31, 2000 By
-----------------------
/s/ Sanjay Subhedar
Chief Operating Officer and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
27.1 Financial Data Schedule
This schedule contains Summary Financial Information extracted from the Balance
Sheet, Statement of Operations and Statement of Cash Flows included in our Form
10-Q for the period ending January 1, 2000, and is qualified in our entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> JAN-01-2000
<CASH> 177,037
<SECURITIES> 0
<RECEIVABLES> 64,892
<ALLOWANCES> (18,494)
<INVENTORY> 49,036
<CURRENT-ASSETS> 291,285
<PP&E> 118,290
<DEPRECIATION> (30,541)
<TOTAL-ASSETS> 476,668
<CURRENT-LIABILITIES> 79,863
<BONDS> 22,949
0
0
<COMMON> 68
<OTHER-SE> 353,438
<TOTAL-LIABILITY-AND-EQUITY> 476,668
<SALES> 132,807
<TOTAL-REVENUES> 132,807
<CGS> 66,730
<TOTAL-COSTS> 66,730
<OTHER-EXPENSES> 43,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,120)
<INCOME-PRETAX> 25,618
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<NET-INCOME> 15,883
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<EPS-BASIC> 0.25
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