UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22874
Uniphase Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2579683
(State or other jurisdiction of incorporation (I.R.S. Employer
Identification No.)
or organization)
163 Baypointe Parkway
San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
(408) 434-1800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of
April 30, 1997 .
Common Stock $.001 par value 16,678,086
Class Number of Shares
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share Three months ended Nine months ended
data) March 31, March 31,
1997 1996 1997 1996
------- ------- ------- -------
Net sales $26,928 $18,876 $73,073 $47,342
Cost of sales 14,703 9,818 39,167 25,102
------- ------- ------- -------
Gross profit 12,225 9,058 33,906 22,240
Operating expenses:
Research and development 2,552 1,634 6,307 4,093
Royalty and license 389 455 1,209 1,205
Selling, general and
administrative 8,965 3,277 17,635 8,942
Infrequent or unusual items:
Acquired in-process research
and development 33,314 --- 33,314 ---
------- ------- ------- -------
Total operating expenses 45,220 5,366 58,465 14,240
------- ------- ------- -------
Income (loss) from operations (32,995) 3,692 (24,559) 8,000
Interest and other income, net 877 449 2,805 887
------ ------- ------- ------
Income (loss) before income
taxes (32,118) 4,141 (21,754) 8,887
Income tax expense 2,429 1,588 6,056 3,226
------- ------- -------- ------
Net income (loss) $(34,547) $ 2,553 $(27,810) $5,661
======= ======= ======== ======
Net income (loss) per share $ (2.08) $ 0.17 $ (1.69) $ 0.43
======= ======= ======== ======
Number of weighted average shares
used in per share amounts 16,612 14,706 16,489 12,962
======= ======= ======== ======
See accompanying notes on page 5
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, June 30,
1997 1996
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents $ 24,268 $ 52,463
Short-term investments 46,766 61,279
Accounts receivable, less allowances for
doubtful accounts of $1,660 at March
31, 1997 and $285 at June 30, 1996 23,202 16,700
Inventories 20,580 10,641
Refundable income taxes 2,207 --
Deferred income taxes and other current assets 5,833 3,542
--------- --------
Total current assets 122,856 144,625
Property, plant and equipment, net 29,113 20,305
Intangible assets 11,652 8,894
--------- --------
Total assets $163,621 $173,824
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ -- $ 548
Current portion of notes payable 6,061 --
Accounts payable 9,381 5,391
Accrued payroll and related expenses 3,758 3,180
Other accrued expenses 6,956 4,464
-------- --------
Total current liabilities 26,156 13,583
Notes payable -- 6,061
Deferred income taxes -- 656
Other non-current liabilities 1,720 319
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares--1,000,000. None issued
and outstanding -- --
Common stock, $0.001 par value:
Authorized shares--20,000,000
Issued and outstanding shares--16,647,008
at March 31, 1997 17 16
and 16,097,855 at June 30, 1996
Additional paid-in capital 151,912 141,354
Retained earnings (deficit) (16,060) 11,750
Net unrealized (loss) on securities available-
for-sale (217) (18)
Foreign currency translation adjustment 93 103
------- --------
Total stockholders' equity 135,745 153,205
------- --------
Total liabilities and stockholders' equity $163,621 $173,824
======= ========
See accompanying notes on page 5
UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Nine Months Ended
March 31,
1997 1996
Operating activities
Net income (loss) $(27,810) 5,661
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,595 1,435
Acquired in-process research and development 33,314 --
Write-off of property, plant and equipment 1,500 --
Write-off of intangible assets and other assets 500 --
Change in operating assets and liabilities:
Accounts receivable (2,702) (4,031)
Inventories (6,595) (3,332)
Deferred income taxes and other current
assets 4,159 152
Accounts payable, accrued liabilities and others 2,858 2,717
------- -------
Net cash provided by operating activities 8,819 2,602
------- -------
Investing activities
Increase in other assets -- 21
Purchase of short-term investments (18,291) (36,731)
Proceeds from sale of short-term investments 32,605 8,212
Purchase of property, plant and equipment (8,894) (14,665)
Purchase of net assets of Laser Enterprise (45,000) --
Purchase of additional equity interest in I.E.
Optomech -- (238)
------- --------
Net cash used in investing activities (39,580) (43,401)
------- --------
Financing activities
Notes payable to bank (548) --
Proceeds from issuance of common stock from public
and other offerings -- 52,812
Proceeds from issuance of common stock under stock
option and stock purchase plans 3,688 3,114
-------- -------
Net cash provided by financing activities 2,566 56,500
-------- -------
Increase (decrease) in cash and cash equivalents (28,195) 15,701
Cash and cash equivalents at beginning of period 52,463 2,880
-------- -------
Cash and cash equivalents at end of period $ 24,268 $18,581
======== =======
Supplemental Cash Flow Information
Tax benefits on stock option and stock purchase
plans $ 6,884 --
======= =======
See accompanying notes on page 5
UNIPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business Activities and Basis of Presentation
On March 10, 1997, the Company executed a definitive agreement with
IBM Corporation (IBM) and acquired the net assets of Uniphase Laser
Enterprises AG (ULE), formerly the laser operations of IBM's Zurich
Research Laboratory in Switzerland (See Note 7). As a result of the
acquisition, the Company recorded in-process research and development costs
of $33.3 million during the third quarter of fiscal 1997 representing the
estimated value of development programs that had not reached technological
feasibility and therefore charged to operations.
The ULE acquisition prompted a change in the Company's strategic focus
with respect to laser diode based applications, resulting in charges of
$4.2 million during the quarter ended March 31, 1997. Of the total charges
approximately $1.0 million was recorded in cost of sales as an inventory
write down and approximately $3.2 million was included in selling, general
and administrative expenses.
As a result of the acquisition, the Company will consolidate its
European laser research to Switzerland, close Uniphase Lasers Ltd., located
in Rugby, England and consolidate the laser packaging operations of UTP
Fibreoptics resulting in $2.2 million of the charges, including a charge
for the impairment of goodwill (see Note 8). In addition, certain customer
and product strategies at UTP incorporating lower powered amplifiers were
modified resulting in charges of $2.0 million related to the write down of
existing asssets and an increase in inventory reserves.
The financial information at March 31, 1997 and for the three-month
and nine-month periods ended March 31, 1997 and 1996 is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
that the Company considers necessary for a fair presentation of the
financial information set forth herein, in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for annual financial statements.
For further information, refer to the Consolidated Financial Statements and
footnotes thereto included or incorporated by reference in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
Certain reclassifications have been made to the fiscal 1996
presentation to conform to the fiscal 1997 presentation.
The results for the three-month and nine-month periods ended March 31,
1997 are not necessarily considered indicative of the results to be
expected for any future period or for the entire year.
Note 2. Inventories
The components of inventory consist of the following:
(In thousands) March 31, June 30,
1997 1996
Raw materials and
purchased parts $ 10,250 $ 4,100
Work in process 8,007 4,382
Finished goods 2,323 2,159
------- ----------
20,580 10,641
======= ==========
Note 3. Taxes
The effective tax rate used for the nine-month period ended March 31,
1997 was 36% applied to income before taxes, exclusive of deductions for
acquired in-process research and development. This rate is based on the
estimated annual tax rate complying with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The Company has
established a valuation allowance against its deferred tax assets generated
in the third quarter of fiscal 1997 due to the uncertainty surrounding the
realization of such assets. Management evaluates on a quarterly basis the
recoverability of the deferred tax assets and the level of the valuation
allowance. At such time as it is determined that it is more likely than not
that deferred tax assets are realizable, the valuation allowance will be
appropriately reduced with the corresponding credit being first to
intangibles resulting from the ULE acquisition and any excess to income tax
expense.
Note 4. Earnings per Share
Net income per share for the three-month and nine-month periods ended
March 31, 1997 is computed using the weighted average number of common
shares outstanding plus primary common share equivalents which have a
dilutive effect on earnings per share. As the Company incurred a loss in
its most recent fiscal year, common share equivalents have been excluded
from the computation for 1997 as they are antidilutive. Since fully diluted
earnings per share differs from primary earnings per share by less than 3%,
only primary earnings per share is shown below. Shares and net income used
in the per share computations are as follows:
Three Months Nine Months Ended
Ended
March 31 March 31
(In thousands, except per share 1997 1996 1997 1996
data)
Weighted average common
shares 16,612 13,616 16,489 11,854
Primary common share
equivalents -- 1,090 -- 1,108
------- ------- ------- -------
Total 16,612 14,706 16,489 12,962
======== ======= ======== =======
Net income $(34,547) $ 2,553 $(27,810)$ 5,661
======== ======= ========= =======
Net income per share $ (2.08) 0.17 (1.69) 0.43
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
June 30, 1998. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase in primary earnings per share
for the three and nine-months ended March 31, 1996 of $0.02 and $0.04 per
share, respectively. The Company's primary common share equivalents for the
three and nine month periods ended March 31, 1997, were anti-dilutive and
accordingly there is expected to be no impact on primary income per share.
The Company has not yet determined what the impact of Statement 128 will be
on the calculation of fully diluted earnings per share.
Note 5. Line of Credit
The Company maintains a $5.0 million revolving bank line of credit
agreement that expires on January 28, 1999. Advances under the line of
credit bear interest at the bank's prime rate (8.5% at March 31, 1997) and
are secured by inventories and accounts receivable. Under the terms of
this agreement, the Company is required to maintain certain minimum working
capital, net worth, profitability levels and other specific financial
ratios. In addition, the line of credit prohibits the payment of cash
dividends and contains certain restrictions on the Company's ability to
lend money or purchase assets or interests in other entities without the
prior written consent of the bank. There were no borrowings under the line
of credit at March 31, 1997.
Through the acquisition of UTP Fibreoptics, the Company assumed
certain previously established lines of credit. All outstanding borrowings
against these lines of credit were paid off in September 1996.
Note 6. Litigation and Contingencies
During fiscal 1996, two former employees commenced wrongful
termination actions against the Company. In September 1996, the Company
received notification of two additional lawsuits from two former employees
alleging fraud and termination in violation of public policy. The Company
believes these claims are without merit and is vigorously defending them.
Even if these claims are adjudicated in favor of the plaintiffs, the
Company does not believe that the ultimate resolution of these matters will
have a material adverse impact on the Company or its operations.
Note 7. Asset Purchase of Uniphase Laser Enterprises AG
On March 10, 1997, the Company executed a definitive agreement with
IBM and acquired the net assets of ULE, formerly the laser operations of
IBM's Zurich Research Laboratory in Switzerland. ULE develops, manufactures
and markets semiconductor chips for use in laser telecommunication
applications.The acquisition has been accounted for under the purchase
method of accounting, and accordingly, the accompanying financial
statements include the operations of ULE subsequent to the date of
acquisition.
The $45.9 million purchase price consisted of $45 million cash and
acquisition expenses of approximately $900,000.
The preliminary allocation of ULE's purchase price based on the fair
value of net assets acquired is as follows:
(In thousands) March 31,
1997
Current assets acquired 9,078
Property, plant and equipment 3,503
Intangibles, primarily developed 4,768
technology
Current liabilities assumed (3,087)
Retirement benefits assumed (1,676)
Acquired in-process research and
development costs 33,314
--------
Total purchase price $45,000
========
The purchased intangibles are being amortized over an average estimated
useful life of five years. Pro-forma results of operations as if the
transaction had occurred at the beginning of fiscal year 1996 are not shown
as the information is unavailable as of this filing. Pro-forma information
is expected to be included in an amendment to Form 8-K the Company
anticipates filing with the Securities and Exchange Commission on or about
May 23, 1997. The purchase price allocation is preliminary and is dependant
upon the Company's final analysis.
Note 8 Goodwill Impairment
At June 30, 1996, intangible assets included the excess of the
investment in I.E. Optomech ("Optomech") over the fair market value of the
net assets acquired of approximately $527,000. The intangible asset was
reviewed during the third quarter of 1997 in light of the Company's
acquisition of ULE and the resultant closure of Optomech. This review
suggested that the Optomech intangible asset was impaired, as determined
based on projected cash flows from Optomech over the remaining amortization
period. The cash flow projections take into effect the change in strategic
focus by the Company for semiconductor laser based applications to ULE, the
costs and expected benefit from Optomech products prospectively, and
management's intention to cease capital funding at Optomech. Consequently,
the carrying value of the Optomech intangible asset totaling $477,000 was
written off as a component of operating expenses during the third quarter.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
UNIPHASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Risk Factors
The statements contained in this Report on Form 10-Q that are not
purely historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs or strategies regarding the
future. Forward looking statements include the Company's' expectations
concerning periodic fluctuations in gross margins and the Company's
liquidity, anticipated cash needs and availability, and anticipated expense
levels under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward looking statements
included in this document are based on information available to the Company
on the date of this Report, and the Company assumes no obligation to update
any such forward looking statement. It is important to note that the
Company's actual results could differ materially from those in such forward
looking statements. Among the factors that could cause actual results to
differ materially are: the cyclicality of the semiconductor industry, the
declining market for gas lasers, development, integration and other risks
relating to solid state laser technologies, management of growth, the
Uniphase Laser Enterprises (ULE) and UTP Fibreoptics acquisition,
variability and uncertainty of quarterly operating results, dependence on
key OEM relationships and concentration of customer base, dependence on
sole and limited source suppliers, difficulties in manufacture of the
Company's products and future capital requirements, as detailed below. You
should also consult the risk factors listed from time to time in the
Company's Reports on Form 10-Q, 8-K, 10-K and Annual Reports to
Stockholders.
Cyclicality of Semiconductor Industry
The Company's Ultrapointe Systems and a portion of its laser
subsystems businesses depend upon capital expenditures by manufacturers of
semiconductor devices, including manufacturers that are opening new or
expanding existing fabrication facilities, which, in turn, depend upon the
current and anticipated market demand for semiconductor devices and the
products utilizing such devices. The semiconductor industry is highly
cyclical, and historically has experienced periods of oversupply, resulting
in significantly reduced demand for capital equipment. The semiconductor
industry is currently experiencing a downturn which has led many
semiconductor manufacturers to delay or cancel capital expenditures.
Certain of the Company's customers have delayed or canceled purchase of the
Company's Ultrapointe Systems. There can be no assurance that the Company's
operating results will not be materially and adversely affected by these
factors. Furthermore, there can be no assurance that the semiconductor
industry will not experience further downturns or slowdowns in the future,
which may materially and adversely affect the Company's business and
operating results.
Management of Growth; UTP Fibreoptics and ULE Acquisition
The Company has experienced recent growth through increased levels of
operations in its existing businesses, the acquisition of UTP in May 1995
and the acquisition of ULE in March 1997. The Company is devoting
significant resources to develop new solid state lasers for OEM customers,
to improve products and increase market penetration of its Ultrapointe
Systems and to increase its penetration of the CATV and telecommunications
industries. In addition, the Company is now increasing its marketing,
customer support and administrative functions in order to support an
increased level of operations primarily from sales of its
telecommunications equipment products. No assurance can be given that the
Company will be successful in creating this infrastructure or that any
increase in the level of such operations will justify the increased expense
levels associated with these businesses.
In May 1996, the Company acquired UTP Fibreoptics. As a result of
acquiring UTP Fibreoptics, the Company has entered the local
telecommunications and data communications market in which it had no
previous experience, and has expanded its employee base. The success of the
UTP Fibreoptics acquisition will be dependent on the Company's ability to
integrate UTP Fibreoptics into its existing operations as a division of
UTP. UTP's ability to manage UTP Fibreoptics will be complicated by the
geographical distance between UTP's facilities in Bloomfield, Connecticut
and Chalfont, Pennsylvania and UTP Fibreoptics's locations in the United
Kingdom and in Batavia, Illinois. There can be no assurance that the
operations of UTP Fibreoptics can be successfully integrated into UTP or
that such integration will not strain the Company's available management,
manufacturing, financial and other resources.
In March 1997, the Company acquired ULE. As a result of acquiring ULE,
the Company has gained access to a proven semiconductor based laser
application for use in telecommunications. The success of the ULE
acquisition will be dependent upon the Company's ability to integrate ULE
980nm lasers and future products used in erbrium doped fiber amplifiers
(EDFA) and to many major telecommunication equipment manufacturers. There
can be no assurance that the ULE operations can be successfully integrated
into UTP or that such integration will not strain the Company's available
management, manufacturing, financial and other resources.
The Company also made capital expenditures in fiscal 1996 to acquire
certain properties in San Jose, California totaling 109,000 square feet,
which included land, buildings and improvements for an aggregate purchase
price of approximately $11.0 million and continues to invest in property,
plant and equipment needed for its business requirements, including adding
to manufacturing capacity throughout the Company. Any failure to utilize
these areas in an efficient manner could have a material adverse effect on
the Company.
The Company currently has no commitments with respect to any future
acquisitions. The Company, however, frequently evaluates the strategic
opportunities available to it and may in the future pursue acquisitions of
additional complementary products, technologies or businesses. Such
acquisitions by the Company may result in the diversion of management's
attention from the day-to-day operations of the Company's business and may
include numerous other risks, including difficulties in the integration of
the operations and products, integration and retention of personnel of the
acquired companies and certain financial risks. Further acquisitions by the
Company may result in dilutive issuances of equity securities, the
incurrence of additional debt, reduction of existing cash balances,
amortization expenses related to goodwill and other intangible assets and
other charges to operations that may materially adversely affect the
Company's business, financial condition or operating results.
Gallium Arsenide
Gallium Arsenide, referred to as GaAs, is a semiconductor material
that has an electron mobility that is up to five times faster than silicon.
As a result, it is possible to design GaAs circuits that operate at
significantly higher frequencies than silicon circuits. At similar
frequencies, GaAs circuits will produce higher signal strength (gain) and
lower background interference (noise) than silicon circuits, permitting the
transmission and reception of information over longer distances. GaAs
circuits can also be designed to consume less power and operate more
efficiently at lower voltages than silicon circuits.
The fabrication of integrated circuits, particularly GaAs devices such
as those sold by ULE is a highly complex and precise process. Minute
impurities, difficulties in the fabrication process, defects in the masks
used to print circuits on a wafer, wafer breakage or other factors can
cause a substantial percentage of wafers to be rejected or numerous die on
each wafer to be nonfunctional. ULE has in the past and may be in the
future experience lower than expected production yields, which could delay
product shipments and adversely affect gross margins, and there can be no
assurance that ULE will be able to maintain acceptable yields in the
future. Because the majority of ULE manufacturing costs are relatively
fixed, manufacturing yields are critical to the results of operations. To
the extent ULE does not achieve acceptable manufacturing yields or
experiences product shipment delays, its business, operating results and
financial condition could be materially and adversely affected.
Risks from Customer Concentration.
A relatively limited number of OEM customers historically have
accounted for a substantial portion of UTP's (including ULE) net sales.
UTP's sales to any single customer are also subject to significant
variability from quarter to quarter. Such fluctuations could have a
material adverse effect on both UTP and the Company's business, operating
results or financial condition. The Company expects that sales of UTP
products to a limited number of customers will continue to account for a
high percentage of the net sales for the foreseeable future. Moreover,
there can be no assurance that UTP's current customers will continue to
place orders or that UTP will be able to obtain new orders from new
customers.
Declining Market for Gas Lasers; Development and Other Risks Relating
to Solid State Laser Technologies
To date, a substantial portion of the Company's revenue has been
derived from sales of gas laser subsystems. The market for gas lasers is
mature and is expected to decline as customers transition from conventional
lasers, including gas, to solid state lasers, which are currently expected
to be the primary commercial laser technology in the future. In response to
this transition, the Company has devoted substantial resources to
developing solid state laser products and has introduced its initial solid
state products. To date, sales of the Company's solid state laser products
have been limited and primarily for customer evaluation purposes. Solid
state laser products are still evolving, and there can be no assurance that
the Company's solid state laser products will be successfully designed into
customers' products or achieve commercial sales volumes. The Company
believes that a number of companies are further advanced than the Company
in their development efforts for solid state lasers and are competing with
evaluation units for many of the same design-in opportunities than the
Company is pursuing. It is anticipated that the average selling price of
solid state lasers may be significantly less in certain applications than
the gas laser products the Company is currently selling in these markets.
If the Company is unable to successfully make this transition from gas to
solid state lasers, its business, operating results and financial condition
will be materially and adversely affected. The Company further believes it
will be necessary to continue to reduce the cost of manufacturing and to
broaden the wavelengths provided by its laser products. There can be no
assurance that the Company will successfully develop new solid state laser
products, or that any solid state laser products will achieve market
acceptance or not be rendered obsolete or uncompetitive by products of
other companies.
Variability and Uncertainty of Quarterly Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company believes
that fluctuations in quarterly results may cause the market price of its
Common Stock to fluctuate, perhaps substantially. Factors which have had an
influence on and may continue to influence the Company's operating results
in a particular quarter include the timing of the receipt of orders from
major customers, product mix, competitive pricing pressures, the relative
proportions of domestic and international sales, costs associated with the
acquisition or disposition of businesses, products or technologies, the
Company's ability to design, manufacture, and ship products on a cost
effective and timely basis, the delay between incurrence of expenses to
further develop marketing and service capabilities and realization of
benefits from such improved capabilities, the announcement and introduction
of cost effective new products by the Company and by its competitors, and
expenses associated with any intellectual property litigation. In addition,
the Company's sales will often reflect orders shipped in the same quarter
that they are received. Moreover, customers may cancel or reschedule
shipments, and production difficulties could delay shipments. The timing of
sales of the Company's Ultrapointe Systems may result in substantial
fluctuations in quarterly operating results due to the substantially higher
per unit price of these products relative to the Company's other products.
In addition, the Company sells its telecommunications equipment products to
OEMs who typically order in large quantities and therefore the timing of
such sales may significantly affect the Company's quarterly results. The
timing of such OEM sales can be affected by factors beyond the Company's
control, including demand for the OEM's products and manufacturing issues
experienced by OEMs. In this regard, the Company has experienced a
temporary rescheduling of orders by OEM telecommunications customers. As a
result of the above factors, the Company's results of operations are
subject to significant variability from quarter to quarter.
There can be no assurance that other acquisitions or dispositions of
businesses, products or technologies by the Company in the future will not
result in substantial charges or other expenses that may cause fluctuations
in the Company's quarterly operating results.
Dependence on Key OEM Relationships
In November 1995, the Company entered into an exclusive OEM resale
agreement with Tencor pursuant to which Tencor will distribute Ultrapointe
Systems through its worldwide distribution channels. As a result of such
agreement, the Company currently expects that Tencor will account for a
majority of Ultrapointe's net sales for the foreseeable future. On January
14, 1997, Tencor and KLA Instruments announced a planned merger. The Tencor
and KLA merge could affect the Company's OEM agreement with Tencor. In
addition, one laser subsystems customer, the Applied Biosystems Division of
Perkin-Elmer Corporation, accounted for approximately 12% of the Company's
net sales for fiscal years 1996, 1995, and 1994, respectively. The loss of
orders from these or other OEM relationships could have a materially
adverse effect on the Company's business and operating results.
Dependence on Sole and Limited Source Suppliers
Various components included in the manufacture of the Company's
products are currently obtained from single or limited source suppliers. A
disruption or loss of supplies from these companies or an increase in price
of these components would have a material adverse effect on the Company's
results of operations, product quality and customer relationships. For
example, the Company obtains all the robotics, workstations and many
optical components used in its Ultrapointe Systems from Equipe
Technologies, Silicon Graphics, Inc., and Olympus Corporation,
respectively. The Company currently utilizes a sole source for the crystal
semiconductor chip sets incorporated in the Company's solid state
microlaser products and acquires its pump diodes for use in its solid state
laser products from SDL, Inc., Opto Power Corporation and GEC. The Company
also obtains lithium niobate wafers, gallium arsenide wafers, specialized
fiber components and certain lasers used in its UTP and ULE products
primarily from Crystal Technology, Inc., Fujikura, Ltd., Philips Key
Modules, and Sumitomo, respectively. The Company does not have long-term or
volume purchase agreements with any of these suppliers, and no assurance
can be given that these components will be available in the quantities
required by the Company, if at all. Further, UTP depends on relatively
specialized components and it cannot be assured that its respective
suppliers will be able to continue to meet UTP's requirements.
Difficulties in Manufacture of the Company's Products
The manufacture of the Company's products involves highly complex and
precise processes, requiring production in highly controlled and clean
environments. Changes in the Company's or its suppliers' manufacturing
process or the inadvertent use of defective or contaminated materials by
the Company or its suppliers could adversely affect the Company's ability
to achieve acceptable manufacturing yields and product reliability. In
addition, UTP has previously experienced certain manufacturing yield
problems that have materially and adversely affected both UTP's ability to
deliver products in a timely manner to its customers and its operating
results. During the fourth quarter of fiscal 1997, the Company will
commence additional manufacturing capacity in proximity to UTP's
Bloomfield, Connecticut facility. No assurance can be given that the
Company will be successful in manufacturing UTP products at this new
facility in the future at performance or cost levels necessary to meet its
customer needs, if at all. In addition, UTP established a transmitter
production facility in Chalfont, Pennsylvania in March 1996 and
consolidated the transmitter production line previously located in
Bloomfield, Connecticut into this facility in April 1996. The Company has
no assurance that this facility will be able to deliver the planned
production qualities of transmitters to customers specifications at the
cost and yield levels required. To the extent the Company or UTP does not
achieve and maintain yields or product reliability, the Company's operating
results and customer relationships will be adversely affected.
Future Capital Requirements
The Company is devoting substantial resources for new facilities and
equipment for Uniphase Laser Enterprise and to the development of new
products for the solid state laser, semiconductor capital equipment, CATV
and telecommunications markets. Although the Company believes existing cash
balances, cash flow from operations and available lines of credit, will be
sufficient to meet its capital requirements at least through the end of
calendar year 1997, the Company may be required to seek additional equity
or debt financing to compete effectively in these markets. The timing and
amount of such capital requirements cannot be precisely determined at this
time and will depend on several factors, including the Company's
acquisitions and the demand for the Company's products and products under
development. There can be no assurance that such additional financing will
be available when needed, or, if available, will be on terms satisfactory
to the Company.
Results of Operations
Recent Events
On March 10, 1997, the Company executed a definitive agreement with
IBM Corporation (IBM) and acquired the net assets of Uniphase Laser
Enterprises AG (ULE), formerly the laser operations of IBM's Zurich
Research Laboratory in Switzerland. As a result of the acquisition, the
Company recorded in-process research and development costs of $33.3 million
during the third quarter of fiscal 1997 representing the estimated value of
development programs that had not reached technological feasibility and
therefore charged to operations.
The ULE acquisition prompted a change in the Company's strategic focus
with respect to diode based laser applications that is discussed in detail
under "Gross Profit" and "Selling, General and Administrative Expense"
herein.
Net Sales
In the third quarter of fiscal 1997, ended March 31, 1997, net sales
were $26.9 million, which represented an $8.0 million or 43% increase over
net sales of $18.9 million in the third quarter of fiscal 1996. For the
first nine months of fiscal 1997, net sales were $73.1 million, which
represented a $25.8 million or 54% increase over net sales of $47.3 million
in the same period of fiscal 1996. Increase in shipments of electro optical
components and cable television transmitters for both the quarter and nine-
month periods contributed to increased sales of $10.1 million and $24.2
million, respectively, by UTP, offset by a decrease in both the quarter and
first nine months of fiscal 1997 in net sales by Ultrapointe of $1.7
million and $2.6 million, respectively. A recent downturn in the
semiconductor industry has led certain of Ultrapointe's customers to delay
or cancel purchase of the Company's Ultrapointe Systems.
Gross Profit
In the third quarter of fiscal 1997, the Company's gross profit
increased to $12.2 million or 45.0% of net sales from $9.1 million or 48%
of net sales in the same period of fiscal 1996. Inventory charges of
approximately $1.0 million resulting from the Company's change in strategic
focus with respect diode based laser applications and from the modification
of certain customer and product strategies incorporating lower powered
amplifiers at UTP contributed to the decline in gross profit to 45% of net
sales during the third quarter of 1997. For the first nine months of fiscal
1997, gross profits were $33.9 million or 46% of net sales as compared to
$22.2 million or 47% from the same period of fiscal 1996. Gross profit as
a percentage of sales also declined for both the quarter and first nine
months of fiscal 1997 due to a decline in net sales of relatively high
margin Ultrapointe Systems and a higher proportion of revenue from certain
low margin telecommunication components. There can be no assurance that the
Company will be able to sustain its gross margin at the current levels.
The Company expects that there will continue to be periodic fluctuations in
its gross margin resulting from changes in its sales and product mix,
competitive pricing pressures, manufacturing yields, inefficiencies
associated with new product introductions and a variety of other factors.
Research and Development Expense
In the third quarter of fiscal 1997, research and development expense
was $2.6 million or 9% of net sales which represented a 56% increase over
research and development expense of $1.6 million or 9% of net sales in the
third quarter of fiscal 1996. For the first nine months of fiscal 1997,
research and development expense was $6.3 million or 9% of net sales which
represents a $2.2 million or 54% increase over the same period in fiscal
1996. The increase in research and development expense is primarily due to
increased expenditures associated with the continued development and
enhancement of the Company's Ultrapointe and telecommunications product
lines.
Royalty and License Expense
In the third quarter of fiscal 1997, royalty and license expense
decreased $66,000 to $389,000 from $455,000 in the same period of fiscal
1996 and decreased as a percentage of net sales to 1% in the quarter ended
March 31, 1997 from 2% in the same period in fiscal 1996. For the first
nine months of fiscal 1997, royalty and license expense of $1.2 million was
consistent with fiscal 1996 but decreased as a percentage of sales to 2%
from 3% in the same period of fiscal 1996 due to the increasing proportion
of revenues that the Company derived from royalty-free UTP products.
The Company continues to develop products in laser, telecommunications
and semiconductor equipment technology. There are numerous patents in these
areas that are held by others, including academic institutions and
competitors of the Company. Such patents could inhibit the Company's
ability to develop, manufacture and sell products in this area. A number
of the patents are conflicting. If there is conflict between a
competitor's patents or products and those of the Company, it could be very
costly for the Company to enforce its rights in an infringement action or
defend such an action brought by another party. In addition, the Company
may need to obtain license rights to certain patents and may be required to
make substantial payments, including continuing royalties, in exchange for
such license rights. There can be no assurance that licenses to third
party technology, if needed, will be available on commercially reasonable
terms.
Selling, General and Administrative Expense
In the third quarter of fiscal 1997, selling, general and
administrative expense was $9.0 million or 33% of net sales, which
represented a $5.7 million increase over selling, general and
administrative expense of $3.3 million or 19% of net sales in the third
quarter of fiscal 1996. For the nine months of fiscal 1997, selling,
general and administrative expense was $17.6 million or 24% of net sales
which represented a $8.7 million increase over selling and administrative
expense of $8.9 million or 19% of net sales in the same period of fiscal
1996. As a result of the ULE acquisition and a change in strategic focus
for diode based laser applications, the Company recorded charges of $3.2
million to consolidate its European Laser research to Switzerland, close
its Uniphase Lasers, Ltd. Facility in Rugby, England , consolidate laser
packaging operations and to recognize the modification of certain customer
and product strategies at UTP incorporating lower powered amplifiers. The
Company also increased its allowance for doubtful accounts and certain
other reserves unrelated to the ULE acquisition by $1.3 million during the
third quarter, primarily related to its telecommunications operations.
These charges increased selling, general and administration expense from
17% to 33% of net sales, and from 18% to 24% for the first nine months of
fiscal 1997.
Acquired In-Process Research and Development
Acquired in-process research and development costs of $33.3 million in
the third quarter of fiscal 1997 were attributable to the Company's net
asset purchase of ULE, formerly the laser operations of IBM's Zurich
Research Laboratory in Switzerland. See Notes 1 and 7 of the Notes to
Condensed Consolidated Financial Statements.
Interest and Other Income, Net
In the third quarter of fiscal 1997, interest and other income, net
was $877,000, which represented a $428,000 increase over $449,000 in the
third quarter of fiscal 1996. For the first nine months of fiscal 1997,
interest and other income, net increased to $2.8 million from $887,000 in
the same period of fiscal 1996. The increase in the interest and other
income, net is due to the related interest on investment of proceeds
received on sale of common stock in June 1996. Non-operating income is
expected to decrease in the fourth quarter due to a reduction in
investments of $45 million for the purchase of ULE during the third quarter
of fiscal 1997.
Income Tax Expense
As stated in Note 3 of Notes to Consolidated Financial Statements, the
effective tax rate used for the first nine months of fiscal 1997 was 36%
applied to profit before taxes, exclusive of the deductions for acquired in-
process research and development as compared to 35% used in the same period
of fiscal 1996. The Company has established a valuation allowance against
its deferred tax assets generated in the third quarter of fiscal 1997 due
to the uncertainty surrounding the realization of such assets. Management
evaluates on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
Liquidity and Capital Resources
At March 31, 1997 the Company's combined balance of cash, cash
equivalents and short-term investments was $71.0 million. The Company has
met its liquidity needs to date primarily through cash generated from
operations and sales of its equity securities.
Cash provided by operations was $8.8 million for the first nine months
of fiscal 1997. Cash provided by operating activities is primarily the
result of net losses of $27.8 million reduced by noncash charges during the
year for depreciation and amortization of $3.6 million and acquired in-
process research and development costs of $33.3 million.
Cash used in investing activities was $39.6 million for the first nine
months of fiscal 1997. The acquisition of ULE accounted for $45 million of
investing activity. The Company incurred capital expenditures of $8.9
million primarily in facilities improvements and the acquisition of
manufacturing and other equipment to expand its manufacturing capacities
and research and development efforts primarily in its telecommunications
product line. These programs were primarily funded through the liquidation
of short-term investments of $14.3 million net during the first nine months
of fiscal 1997. The Company also anticipates additional capital
expenditures of approximately $6 million for the remainder of the fiscal
year.
The Company generated $2.6 million from financing activities for the
nine-month period ended March 31, 1997. The increase is due primarily to
the exercise of stock options and the sale of stock through an employee
stock purchase plan totaling $3.l million.
The Company has a $5.0 million revolving line of credit with a bank.
There were no borrowings under the line of credit at March 31, 1997.
Advances under the line of credit bear interest at the bank's prime rate
(8.5% at March 31, 1997) and are secured by inventories and accounts
receivable. Under the terms of the line of credit agreement, the Company
is required to maintain certain minimum working capital, net worth,
profitability levels and other specific financial ratios. In addition, the
agreement prohibits the payment of cash dividends and contains certain
restrictions on the Company's ability to borrow money or purchase assets or
interests in other entities without the prior written consent of the bank.
The line of credit expires on January 28, 1999. Through the acquisition of
UTP Fibreoptics, the Company assumed certain previously established lines
of credit. All outstanding borrowing against these lines of credit were
repaid in September 1996.
The Company believes that its existing cash balances and short-term
investments, together with existing cash flow from operations and available
line of credit will be sufficient to meet its liquidity and capital
spending requirements at least through the end of calendar year 1997.
However, possible acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There
can be no assurance that additional financing will be available when
required or, if available, will be on terms satisfactory to the Company.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3. Legal Proceedings, in the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1996 and Part II,
Item 1. Legal Proceedings in the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
2.1 Purchase Agreement among Uniphase Corporation,
International Business Machines
Corporation, and Uniphase Laser Enterprise AG (incorporated by reference to
exhibits of Registrant's Form 8-K filed on March 25,
1997).
2.2 Technology License Agreement (incorporated by reference
to exhibits of Registrant's Form 8- K filed on March 25,
1997).
2.3 Patent License Agreement (incorporated by reference to
exhibits of Registrant's Form 8-K filed on March 25, 1997).
2.4 The Agreement for Exchange of Confidential Information
(incorporated by reference to exhibits of Registrant's
Form 8-K filed on March 25, 1997).
10.1 Loan and Security Agreement, dated January 28, 1997, between
Bank of the West and Registrant.
(incorporated by reference to exhibit 10.1 of Registrant's Form 10-
Q for the quarter ended December 31, 1996 as filed on February 14, 1997).
27. Financial Data Schedule
b) Forms 8-K
The Company reported its purchase of the assets of IBM Laser
Enterprise with the Commission on March 25, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Uniphase Corporation
(Registrant)
Date May 7, 1997 /s/ Danny E. Pettit
Danny E. Pettit, Vice President of Finance
and CFO
(Principal Financial and Accounting Officer)
Date May 7, 1997 /s/ Kevin N. Kalkhoven
Kevin N. Kalkhoven, Chairman and CEO
(Principal Executive Officer)
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