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 April 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
from
------------ -----------
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
of Incorporation or Identification Number)
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 April 1, 2000, 68,001,398 shares of the Registrant's common stock were
outstanding.
1
<PAGE>
E-TEK Dynamics, Inc.
FORM 10-Q
April 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 Nine Months Ended April 1, 2000 and April 2, 1999 3
Consolidated Balance Sheets as of April 1, 2000 and
June 30, 1999 4
Consolidated Statements of Cash Flows for the Nine
Months Ended April 1, 2000 and April 2, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
</TABLE>
2
<PAGE>
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 Nine Months Ended
----------------- ------------------
Apr. 1, Apr. 2, Apr. 1, Apr. 2,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net revenues $ 90,628 $49,472 $223,435 $121,122
Cost of goods sold 45,668 24,495 112,398 59,338
-------- -------- --------- --------
Gross profit 44,960 24,977 111,037 61,784
-------- -------- --------- --------
Operating expenses:
Research and development 8,562 4,233 19,783 10,564
Selling, general and administrative 10,423 7,065 26,561 18,208
Purchased in-process research and
development - - 1,630 -
Amortization of intangibles 8,325 - 22,915 -
-------- -------- --------- --------
Total operating expenses 27,310 11,298 70,889 28,772
-------- -------- --------- --------
Operating income 17,650 13,679 40,148 33,012
Interest income 2,415 1,185 6,372 2,595
Interest expense (565) (417) (1,402) (1,042)
-------- -------- --------- --------
Income before income taxes 19,500 14,447 45,118 34,565
Provision for income taxes 7,410 5,779 17,145 13,826
-------- -------- --------- --------
Net income 12,090 8,668 27,973 20,739
Convertible preferred stock accretion - - - 3,882
-------- -------- --------- --------
Net income available to Common
Stockholders $ 12,090 $8,668 $27,973 $16,857
======== ======== ======== ========
Net Income per share:
Basic $ 0.18 0.15 0.43 0.44
Diluted $ 0.17 0.14 0.40 0.34
Shares used in net income per share
Calculations:
Basic 66,103 57,720 64,473 38,244
Diluted 71,848 63,719 70,107 60,910
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
E-TEK Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 1, June 30,
2000 1999
----------- -----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 185,415 $ 55,090
Accounts receivable, net 55,156 29,831
Inventories 62,188 20,367
Deferred tax assets 13,649 13,542
Other current assets 8,675 3,542
----------- -----------
Total current assets 325,083 122,372
Property and equipment, net 103,804 61,874
Long-term investments 17,666 11,665
Goodwill and other intangibles, net 73,894 34,585
----------- -----------
Total assets $ 520,447 $ 230,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,927 $ 17,762
Accrued liabilities 32,464 26,352
Income taxes payable 19,215 4,337
Current portion of capital lease obligations 1,353 1,277
Current portion of long-term debt 15,211 6,101
----------- -----------
Total current liabilities 101,170 55,829
Capital lease obligations, net of current
portion 1,268 2,281
Long-term debt, net of current portion 33,370 19,232
Deferred income taxes 18,802 3,481
----------- -----------
Total liabilities 154,610 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, 68,001 and 62,054 shares
issued and outstanding, respectively 68 63
Additional paid-in capital 400,933 216,124
Notes receivable from stockholders (9,686) (11,454)
Deferred compensation (2,511) (3,805)
Distribution in excess of net book value (83,901) (83,901)
Retained earnings 60,619 32,646
Cumulative translation adjustment 315 -
----------- -----------
Total stockholders' equity 365,837 149,673
----------- -----------
Total liabilities and stockholders'
equity $ 520,447 $ 230,496
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
E-TEK Dynamics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Apr.1, Apr. 2,
2000 1999
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,973 $ 20,739
Adjustments to reconcile net income to net
Depreciation and amortization 36,250 8,382
Stock compensation expense 486 1,126
Imputed interest income (79) (721)
Purchased in-process research and
development 1,630 -
Changes in assets and liabilities:
Accounts receivable (21,867) (10,639)
Inventories (37,736) (10,599)
Deferred income taxes 24 -
Other current assets (4,493) (1,313)
Accounts payable 12,336 6,762
Accrued liabilities 1,998 10,260
Income taxes payable 14,878 2,748
------------ -----------
Net cash provided by operating
activities 31,400 26,745
------------ -----------
Cash flows from investing activities:
Additions to property and equipment (49,766) (30,373)
Long-term investments (6,001) (1,964)
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 (78,868) (25,337)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net - 43,518
Proceeds from secondary offering, net 146,990 -
Proceeds from exercise of Common Stock 6,066 -
Proceeds from Employee Stock Purchase Plan 1,970 -
Principal payments on capital lease
obligations (937) (953)
Principal repayments on notes receivable
from stockholders 2,639 1,694
Borrowings on short-term debt 269 -
Payments on short-term debt (898) -
Borrowings on long-term debt 27,500 20,175
Payments on long-term debt (6,118) (4,017)
------------ -----------
Net cash provided by financing
activities 177,481 60,417
------------ -----------
Effect of exchange rate changes on cash 312 -
Net increase in cash and cash equivalents 130,325 61,825
Cash and cash equivalents at beginning of
period 55,090 21,918
------------ -----------
Cash and cash equivalents at end of period $ 185,415 $ 83,743
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 1,648 $ 1,020
Income taxes paid $ 2,585 $ 11,078
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
E-TEK Dynamics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial data as of April 1, 2000 and April 2, 1999
and for the quarter and nine month periods ended April 1, 2000 and April 2,
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 April 1, 2000 and for the 3 month
and 9 month periods (as applicable) ended April 1, 2000 and April 2, 1999, have
been made. The results of operations for the period ended April 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>
Apr.1, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials............................... $23,650 $10,613
Work in process............................. 26,840 7,577
Finished goods.............................. 11,698 2,177
----------- -----------
$62,188 $20,367
=========== ===========
</TABLE>
6
<PAGE>
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 Nine Months Ended
------------- -----------------
Apr. 1, Apr. 2, Apr. 1, Apr. 2,
------- ------- -------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income....................... $ 12,090 $ 8,668 $ 27,973 $ 20,739
Convertible Preferred Stock
accretion........................ - - - 3,882
-------- ------- --------- --------
Net income available to Common
Stockholders (Basic)............ 12,090 8,668 27,973 16,857
Convertible Preferred Stock
accretion....................... - - - 3,882
-------- ------- --------- --------
Net income available to Common
Stockholders and assumed
Conversions (Diluted)........... $ 12,090 $ 8,668 $ 27,973 $ 20,739
======== ======= ======== =========
Denominator:
Denominator for basic earnings per
share-weighted average common
shares 66,013 57,720 64,473 38,244
Effect of dilutive securities
Common Stock options............ 3,878 2,280 3,294 1,772
Unvested Common Stock subject
to repurchase 1,957 3,719 2,340 4,549
Convertible Preferred Stock.... - - - 16,345
-------- ------- --------- --------
Denominator for dilutive earnings
per share-adjusted weighted average
common shares and assumed
conversions...................... 71,848 63,719 70,107 60,910
Basic earnings per share........... $0.18 $0.15 $0.43 $0.44
-------- ------- -------- ---------
Diluted earnings per share......... $0.17 $0.14 $0.40 $0.34
-------- ------- -------- ---------
</TABLE>
4. Comprehensive income
Comprehensive income for the quarter ended April 1, 2000 was $12,241,000, and
for the nine months ended April 1, 2000 was $28,288,000.
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 entered into an Agreement and Plan of Reorganization and
Merger with JDS Uniphase Corporation. On April 2, 2000, we announced that we and
JDS Uniphase had received requests for additional information and other
documents from the Antitrust Division of the U.S. Department of Justice under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to our
proposed merger with JDS Uniphase. Upon completion of this proposed transaction,
our stockholders will receive 2.2 shares of JDS Uniphase common stock for each
share of E-TEK common stock they own, and we will become a wholly-owned
7
<PAGE>
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 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 in a report on Form 8-K.
Those documents contain the specific terms and conditions of the transaction.
More information about JDS Uniphase is available in its reports to the
Securities and Exchange Commission, which are on the Internet at www.sec.gov.
Those reports include a Form 8-K filed on 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. These statements include statements regarding our proposed
merger with JDS Uniphase, our future business results, relationships with
customers and suppliers, and are subject to a number of risks and uncertainties,
including risks relating to regulatory approvals of the merger, dependence on
key customers and suppliers, and our ability to meet demand through production.
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),
Annual Report on Form 10-K and the preliminary form of proxy statement contained
in the Registration Statement on Form S-4 of JDS Uniphase Corporation (File No.
333-30240), 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 fiberoptic 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
long-haul terrestrial 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 new products, estimated product
returns, and allowances. A relatively small number of customers have 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.
8
<PAGE>
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 Nine Months ended
Apr. 1, Apr. 2, Apr. 1, Apr. 2,
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 49.5 50.3 49.0
--------- ---------- --------- ---------
Gross profit..................... 49.6 50.5 49.7 51.0
--------- ---------- --------- ---------
Operating expenses:
Research and development......... 9.4 8.6 8.9 8.7
Selling, general and administrative 11.5 14.3 11.9 15.0
Purchased in-process R&D......... 0.0 0.0 0.7 0.0
Amortization of intangibles...... 9.2 0.0 10.2 0.0
--------- ---------- --------- ---------
Total operating expenses...... 30.1 22.9 31.7 23.7
--------- ---------- --------- ---------
Operating income.................... 19.5 27.6 18.0 27.3
Interest income..................... 2.6 2.4 2.8 2.1
Interest expense.................... (0.6) (0.8) (0.6) (0.9)
--------- ---------- --------- ---------
Income before income taxes.......... 21.5 29.2 20.2 28.5
Provision for income taxes.......... 8.2 11.7 7.7 11.4
--------- ---------- --------- ---------
Net income.......................... 13.3% 17.5% 12.5% 17.1%
--------- ---------- --------- ---------
</TABLE>
Quarters Ended April 1, 2000 and April 2, 1999
Net Revenues
Net revenues increased 83.2% to $90.6 million in the third quarter of fiscal
2000, from $49.5 million in the third quarter of fiscal 1999. The revenue
increase was primarily due to increased shipments of products for dense
wavelength division multiplexing systems, optical amplifiers, and optical
modules. The WDM product family 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 ultra long-haul, 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 and subsystems, which may impact our ability
to build and ship products and generate revenues.
Gross Profit
Gross profit increased 80.0% to $45.0 million for the third quarter of fiscal
2000 from $25.0 million in the third 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 50.5% 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, California, including a new manufacturing
training center. These costs are partially offset through higher unit shipments.
In March 2000, we signed an agreement for the development and lease of a new
facility in Shenzhen, China, aggregating an additional 320,000 square feet. We
expect our growth and expansion plans in San Jose, California, China, and
9
<PAGE>
elsewhere in Asia to continue to have an adverse effect 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 (R&D) expenses consist of compensation costs for
personnel, depreciation of equipment, and prototype materials. Research and
development expenses were $8.6 million for the third quarter of fiscal 2000
representing 9.4% of net revenues. This represents a 102.3% increase over the
third quarter of fiscal 1999 R&D expenses of $4.2 million or 8.6% of net
revenues. The increase was primarily due to the increase in R&D personnel and
material costs. We expect that R&D expenses will continue to increase in
absolute dollars for the remainder of fiscal 2000 as we invest in expanding and
enhancing our product lines, although such expenses may vary as a percentage of
net revenues in future periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation costs for
personnel, sales commissions, travel expenses, marketing programs, trade shows,
professional services, accounting, human resources, executive management and
consulting. Selling, general and administrative expenses were $10.4 million for
the third quarter of fiscal 2000, representing 11.5% of net revenues. This
represents a 47.5% increase over selling, general and administrative expenses
for the third quarter of fiscal 1999 of $7.1 million or 14.3% 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, although such expenses may
vary as a percentage of net revenues in future periods.
Amortization of Purchased Intangibles
Amortization of purchased intangibles was $8.3 million in the third quarter of
fiscal 2000 due to the amortization of 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 third quarter of
fiscal 2000, which represents an increase of $1.2 million from the third 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 collateralized by our property and
equipment, and on capital leases, was $0.6 million for the third quarter of
fiscal 2000.
Provision for Income Taxes
Our combined federal and state income tax provision was 38% for the third
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
10
<PAGE>
difference resulting from our purchase of ElectroPhotonics. Our future tax rate
may be adversely affected by acquisition related activities.
Nine Months Ended April 1, 2000 and April 2, 1999
Net Revenues
Net revenues increased 84.5% from $121.1 million for the nine months ended April
2, 1999 to $223.4 million for the nine months ended April 1, 2000. The increase
in net revenues reflected higher shipments of products for dense wavelength
division multiplexing systems, optical amplifiers, and optical modules.
Gross Profit
Gross profit increased 79.7% from $61.8 million for the nine months ended April
2, 1999 to $111.0 million for the nine months ended April 1, 2000. Gross profit
margins declined from 51.0% to 49.7% during these periods, primarily due to
declining ASPs and the additional costs associated with the expansion of our
manufacturing capacity. These costs are partially offset through higher unit
shipments.
Research and Development Expenses
Research and development expenses increased 87.3% from $10.6 million for the
nine months ended April 2, 1999, which represented 8.7% of revenues, to $19.8
million for the nine months ended April 1, 2000, which represented 8.9% 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 45.9% from $18.2 million
for the nine months ended April 2, 1999 which represented 15.0% of revenues, to
$26.6 million for the nine months ended April 1, 2000, which represented 11.9%
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 $2.6 million in the nine months ended April 2,
1999 to $6.4 million in the nine months ended April 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 $1.0 million in
the nine months ended April 2,1999 to $1.4 million in the nine months ended
April 1, 2000, reflecting a higher level of borrowings.
Amortization of Purchased Intangibles
Amortization of purchased intangibles was $22.9 million for the nine months
ended April 1, 2000, due to the amortization of intangible assets generated from
our acquisitions of Kaifa, ElectroPhotonics, and FibX, all of which were
accounted for as purchases.
Liquidity and Capital Resources
11
<PAGE>
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from our operations, borrowings and
equity financing. Our operating activities provided cash of $31.4 million for
the nine months ended April 1, 2000 as compared to $26.7 million for the nine
months ended April 2, 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. On April 1, 2000, we had cash and cash
equivalents of $185.4 million and working capital of $223.9 million.
Net cash used in investing activities was $78.9 million for the nine months
ended April 1, 2000 as compared to $25.3 million used in investing activities
for the nine months ended April 2, 1999. The net cash used in the nine months
ended April 1, 2000 related primarily to capital expenditures, to the Kaifa and
FibX acquisitions, and to other long-term investments.
Net cash provided by financing activities was $177.8 million for the nine months
ended April 1, 2000, as compared to $60.4 million for the nine months ended
April 2, 1999. Net cash provided by financing activities for the nine months
ended April 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 problems. 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
2.2 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. On April
12
<PAGE>
2, 2000, we announced that we and JDS Uniphase had received requests for
additional information and other documentary material from the Antitrust
Division of the U.S. Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. There can be no assurance 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.
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, to date, 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 third quarter of fiscal 2000, our three largest
customers and their related entities accounted for 54% 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.
13
<PAGE>
Sales of wavelength division multiplexing components, modules and subsystems
accounted for over 50% of our revenues in the third 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.
If we cannot obtain an adequate supply of raw materials or equipment, our
product revenues may decline.
We use many raw materials and sub-components that are in short supply, and in
some cases from sole sources. These range from basic items such as connectors
and fiber, to more complex items such as specialized crystals, glass lenses, and
thin film filters. For example, we have previously experienced, and continue to
experience, shortages of thin-film filters, which has limited our ability to
ship products and generate revenues.
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 could cause our shipments and revenues to decline. We
have a limited number of long term agreements with our suppliers, and there is
an increasing number of new entrants in our industry who are placing further
demands on our suppliers. If our suppliers do not invest in additional capacity
and ramp up their operations in accordance with industry growth, and if we are
not successful in identifying and qualifying additional sources of supply, we
may not be able to meet our customers' demands for greater volumes of products.
Some of our suppliers are also competitors of ours. In addition, some of our
competitors may be able to draw upon internal sources of raw material or
sub-component supply. Thus, our access to supplies may be decreased, and our
cost of supplies may increase as a result of actions by our competitors.
The increase in the number of WDM wavelengths, narrower spacing requirements and
greater integration increases product complexity, which may adversely affect our
yields, revenues, and inventory levels.
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, raw materials, or sub-components 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.
All these trends also cause us to carry a greater range and value of inventory,
which in turn substantially increase the risks of excess and obsolescence, and
therefore may adversely impact our gross profit margins.
Other technologies that offer narrower wavelength spacing, such as arrayed wave
guides or fiber Bragg gratings, have been introduced to the market as an
alternative to thin film filter WDMs. Acceptance of these products could
adversely impact our revenues.
We may not be able to reduce our manufacturing costs sufficiently or plan our
manufacturing expansion accurately.
14
<PAGE>
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
China and elsewhere in Asia. 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;
Shortage of raw materials;
Unforeseen environmental or engineering problems;
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.
We are also working on the automation of manufacturing processes and related
equipment in order to lower costs through improved yields and reduced cycle
time. Delays in implementation may reduce our ability to meet demand and have an
adverse effect on our gross profit margins.
15
<PAGE>
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;
Our ability to maintain acceptable yields in manufacturing;
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;
The successful introduction of new products;
Customer cancellations or delivery deferrals;
Seasonality of customer demand; and
Difficulties in collecting accounts receivable.
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 commit to capital expenditures and increases in capacity 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 fiberoptic component industry is highly competitive, and we could lose sales
to our competitors and our customers.
16
<PAGE>
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. Further, several of our largest customers also manufacture
and sell products that are competitive to ours, and have announced that they are
increasing the development of their own internal sources of supply in
competition with us.
For example, Corning 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. On February 14, 2000,
Corning announced it was forming a new venture with Samsung Electronics to
mass-produce DWDM packaged components "using revolutionary robotics and other
automation developed by Samsung in key manufacturing steps currently done
manually." On February 14, Corning also announced that it was acquiring NetOptix
for $2 billion in stock in order to "make a leap forward in [its] ability to
provide DWDM passive components." NetOptix produces thin film filters for use in
DWDM components. Corning has also announced acquisitions of optical cable and
passive components businesses from Siemens and technology from the British
Telecommunications Photonics Technology Research Center.
Lucent Technologies 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. On
February 15, 2000, Lucent Technologies Microelectronics Group announced a $30
million investment to expand its optoelectronics components operations. This
investment is expected to result in a four-fold increase in Lucent's output of
optical components in 2000. On February 22, 2000, Lucent announced that it was
forming a joint venture with DiCon Fiberoptics, Inc., a company based in
Berkeley, California, that is a "leading supplier of passive optical
components," and a significant competitor in thin film filter-based WDMs.
In addition, Nortel Networks announced in November 1999 a $400 million
investment in its optical networking and components business including a new
facility for the fabrication of optical components. On February 14, 2000, Nortel
announced that it was investing an additional $260 million (on top of its
previously announced $400 million investment) to expand its optical network and
component manufacturing facilities. On March 14, 2000, Nortel announced an
agreement to acquire Xros, a leader in photonic switching, for US$3.25 billion
in Nortel stock as "another key building block in Nortel Networks strategy to be
the first-mover in delivering the all-optical Internet." On March 21, 2000,
Nortel announced an agreement to acquire CoreTek, a pioneer in strategic optical
components, for up to US$1.43 billion in Nortel stock. On May 5, 2000, Nortel
17
<PAGE>
announced that it will bring its various optical components businesses together
to create a global high performance optical components powerhouse. Nortel stated
that the new business entity, named High Performance Optical Components
Solutions, will serve both Nortel Networks' industry leading optical Internet
capabilities and the optical networking market at large.
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.
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 and sell new products, we will not 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.
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
financing.
Also, under the terms of the merger, we must obtain the consent of JDS Uniphase
prior to any significant investments or acquisitions. There is no assurance that
we will obtain JDS Uniphase's consent for any proposed acquisitions, which may
adversely affect our ability to enter into strategic relationships.
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, 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.
18
<PAGE>
If we are unable to hire and retain the necessary manufacturing, engineering,
managerial, sales and marketing personnel, we may not be able to grow our
revenues.
Our international sales could be delayed or could incur 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.
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. This expansion requires
significant investments which could be adversely affected by exchange controls,
currency fluctuations, nationalization, social and political risks, and other
factors, depending on the countries in which we are investing in. Difficulties
in non-U.S. financial markets and economies, and of non-U.S. financial
institutions, could also adversely affect our expansion plans and investments.
Our international operations could also 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
19
<PAGE>
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.
20
<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 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: May 12, 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 April 1, 2000, and is qualified in our entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> APR-01-2000
<CASH> 185,415
<SECURITIES> 0
<RECEIVABLES> 77,315
<ALLOWANCES> (22,159)
<INVENTORY> 62,188
<CURRENT-ASSETS> 325,083
<PP&E> 139,795
<DEPRECIATION> (35,991)
<TOTAL-ASSETS> 520,447
<CURRENT-LIABILITIES> 101,170
<BONDS> 33,370
0
0
<COMMON> 68
<OTHER-SE> 365,837
<TOTAL-LIABILITY-AND-EQUITY> 520,447
<SALES> 223,435
<TOTAL-REVENUES> 223,435
<CGS> 112,398
<TOTAL-COSTS> 112,398
<OTHER-EXPENSES> 70,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,970)
<INCOME-PRETAX> 45,118
<INCOME-TAX> 17,145
<INCOME-CONTINUING> 27,973
<DISCONTINUED> 0
<CHANGES> 0
<NET-INCOME> 27,973
<EXTRAORDINARY> 0
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.40
</TABLE>
